Freight rates for ESPO Blend crude oil being transported from the Russian port of Kozmino to destinations in China experienced a further decline in April, reaching their lowest point since mid-January.
This downward trend in shipping costs, according to three traders familiar with the matter, is primarily attributed to an increased availability of tanker vessels in the region, according to a Reuters report.
Greater competition
The rise in the number of available tankers has introduced greater competition among shipowners, leading to a reduction in the prices they can command for their services.
This easing of freight rates has implications for the overall cost of delivering ESPO Blend crude to Chinese refineries, potentially impacting the profitability of these shipments and the pricing dynamics within the East Asian oil market.
The ESPO Blend crude is a significant grade for independent refineries in China, and fluctuations in its freight rates are closely monitored by market participants to gauge supply and demand balances and regional shipping market conditions.
The fact that rates have fallen to a multi-month low suggests a potentially significant increase in tanker capacity relative to the current demand for shipping this particular crude grade on this specific route.
Lower rates benefit Russia
Reduced rates benefit Russian exporters by decreasing their shipping expenses and increasing their oil revenue.
Freight rates for April-loading cargoes on the ESPO route have decreased to approximately $2-3 million, a significant drop from the $4-5 million seen in February and March.
This decline is attributed to an increased number of non-sanctioned tankers entering the ESPO market.
Early in April, Russia’s ESPO Blend crude oil price dropped below the Western-imposed price cap of $60 per barrel for the first time.
This decline coincided with international Brent crude hitting multi-year lows, according to Reuters calculations based on information from three trading sources.
Traders indicated that the price has fluctuated since then, but it has generally stayed near the $60 per barrel cap.
Higher costs
One of the traders was quoted in the report:
ESPO Blend hovers around $60 (per barrel). Higher oil prices and lower freight rates may bring its price back above the cap again.
This complicates the process of finding vessels.
Following the imposition of US sanctions on vessels involved in Russian oil shipments on January 10, the cost of transporting ESPO Blend to China significantly increased, reaching $6 million to $7.5 million.
This surge occurred because numerous vessels operating at the Kozmino port were targeted by the sanctions.
The US imposed sanctions on Russia’s oil sector, targeting prominent companies such as Surgutneftegaz and Gazprom Neft. The sanctions also encompassed over 180 vessels.
Prior to the most recent US sanctions, the cost of shipping oil from Kozmino to northern Chinese ports was under $1.5 million.
According to traders, these costs could potentially return to similar levels later this year, provided no further limitations are imposed on Russian oil transportation.
Source: Invezz