Surge in Tanker Freight Rates Fuels Heavy Crude Buildup in the Americas

Heavy crude, which refiners typically favor for its lower cost, is piling up in North and South America as a sharp rise in supertanker freight rates curbs exports, just as U.S. refineries run near maximum capacity. This has opened an unusual gap in the global oil market: while buyers in Asia and Europe face supply shortages, benchmark crude remains above $100 per barrel.

The rise in regional supply stems from several factors: Venezuelan exports surged after the United States captured former president Nicolás Maduro in January and spurred a revival of the country's oil sector. In addition, Canadian production hit a record high, and Washington released more than 130 million barrels from its emergency strategic reserve.

The cost of chartering a supertanker from the U.S. Gulf Coast to Asia has more than quintupled since February, topping $80 million, or about $40 per barrel, up from $10 million to $15 million at the start of the year. Ship-to-ship transfers in the Gulf of Oman, triggered by the war between the United States and Iran, are tying up vessels worldwide. The cost to Europe also rose to around $46 million, or $24.50 per barrel, compared with $6.5 million before the conflict. Scott Shelton, an energy specialist at TP ICAP, noted that freight is the key factor, since there is demand for vessels but rates keep climbing while ship availability keeps falling.

As a result of higher shipping costs, prices for the main heavy crude grades from Canada, Colombia and Ecuador fell more than $10 per barrel to their lowest level in six weeks, according to Argus Media. Western Canadian Select was trading around $74, Colombian Vasconia near $84, and Ecuadorian Oriente around $76, while Venezuelan crude stood near $74.50, excluding freight costs.

U.S. refineries have operated at an average of 93.5% of capacity so far this year, the highest level in 28 years, according to the Energy Information Administration (EIA), as they maximize output to take advantage of high diesel prices. Although many are designed to process heavier crudes, they can only do so up to a certain share of their total capacity, and several plants configured for Gulf of Mexico Mars Sour crude must blend in lighter grades in order to process Canadian or Venezuelan oil.