【TMGM Financial Recap】How Are Shipping Costs Shaping Oil Prices? Goldman Sachs: Global Crude Shipping Costs Top $20 per Barrel, Compared with $3 a Year Ago

Global crude oil freight costs have surged, with Goldman Sachs’ October 20 report drawing attention to four figures. Average seaborne shipping costs worldwide now exceed $20 per barrel, against $3 a year earlier, while Middle Eastern routes command $35 per barrel. Three identifiable components account for $15 per barrel: $7 for war risk insurance covering the Strait of Hormuz, $4 for fuel and $4 for ship-to-ship transfers in the Gulf of Oman.

Shipping a cargo from the US Gulf Coast to China aboard a very large crude carrier (VLCC) cost $76 million in early October, or approximately $38 per barrel. Quotes on this route had been between $7 million and $10 million before the conflict. The quoted price of a VLCC, meanwhile, climbed 50% in three weeks to $82 million.

For Brent crude, Goldman Sachs maintains a year-end baseline forecast of $90 per barrel. Freight charges represent one of three upside risks identified in the report; the other two are an intensification of attacks on shipping and damage to oil infrastructure.

Why Are Forty Percent of VLCCs Queuing for Transfers in and Around the Persian Gulf?

VLCC time charter equivalent rates on the Middle East Gulf–China route (TD3C) hit $1.4126 million per day in the Baltic Exchange’s October 8 assessment. The corresponding rate for the Middle East Gulf–Singapore route (TD2) was $1.4127 million per day that day. Compared with its pre-conflict level of $210,000 per day, the TD3C rate has increased by approximately 570%.

Oil-producing countries are using their own tankers to load crude because buyers’ vessels are unwilling to enter the strait. Once these tankers have crossed the strait, they hand over their cargoes to ships waiting in the Gulf of Oman. Moving a single cargo therefore involves two loading and unloading operations and occupies two vessels at once, adding more than two weeks to the time needed for a direct voyage. Nearly one-sixth of tankers in the Persian Gulf and Gulf of Oman are involved in these transfers on any given day. Vessels at anchor continue to incur charter charges, which are ultimately passed on to cargo owners as a per-barrel cost.

The Persian Gulf and its surrounding waters account for 40% of the roughly 850 VLCCs in the global fleet. Elevated freight rates have attracted ships from elsewhere as well, leaving less capacity available on other routes. Although Middle Eastern crude exports had recovered to pre-war levels by late September, freight charges had not declined in line with that recovery.

The rise in daily vessel rates extends to other routes. As VLCCs remain occupied in the Persian Gulf, cargo owners are switching to Suezmax and Aframax tankers, lifting daily rates in both categories. In its weekly report, shipbroker Fearnleys said rates for the two vessel classes showed no sign of slowing. This explains the increase in average global freight costs from $3 to $20 per barrel. Middle Eastern routes cost $35; rates elsewhere remain lower but have also risen as ships are diverted to other regions. In Goldman Sachs’ assessment, the forces sustaining freight rates will remain in place for as long as the Middle East conflict continues in its current form.

For shipowners, the bigger challenge with war risk insurance is not merely the higher cost, but the need to renegotiate rates daily. Premiums stood at approximately 0.25% of a vessel’s value before the war and briefly touched 10% after hostilities began. Brokers now quote between 3% and 10%, with the current midpoint around 5%. A single transit through the strait by a vessel valued at $100 million consequently attracts a premium of several million dollars, compared with $250,000 previously. Certain underwriters finalise rates only six hours before entry into the strait, while policies cover periods of just three to seven days.

Why Do Refining Margins Feel the First Squeeze as Freight Raises Landed Costs?

Refiners face a landed cost of nearly $144 when the $35 freight charge on Middle Eastern routes is added to Brent crude’s October 21 closing price of $108.82 per barrel. This combined cost is what they pay for the crude.

Higher effective landed prices would curb refiners’ aggregate crude demand, Goldman Sachs said in the report. Sourcing from suppliers nearer to home is another option refiners may pursue, altering established trade flows. The gap between landed costs and the benchmark market price has widened to 32%, from less than 5% a year earlier. Hedging against the benchmark does not allow refiners to lock in the extra $35. As freight charges climb, refiners purchase less crude and crude prices decline more quickly. Repsol of Spain reported a refining margin of $36 per barrel for the third quarter; market estimates, however, put its October margin at around $15.

How Do Crack Spreads Add to Refined Product Costs With Diesel Already at $100?

At approximately $100 per barrel in October, the diesel crack spread was well above its normal $15 to $30 range. The price of refined products combines the crude oil cost with the crack spread, and freight is already part of that initial cost.

A year-on-year increase of more than 70% took US retail diesel prices to $6.2785 per gallon on October 9. US diesel stocks are at their lowest seasonal level since 1982, and European stocks sit below their five-year average. Next month marks the start of the Northern Hemisphere heating season. With heating oil and diesel coming from the same refining units, demand remains relatively inflexible: approximately 2.94 million barrels of diesel per day are consumed by the US transportation sector alone.

Restrictions on Russian diesel imports were relaxed by the White House on October 9, under an authorisation lasting through April 7, 2027. It subsequently loaned 315,000 barrels from the Northeast Home Heating Oil Reserve on October 21, equivalent to one-third of the reserve, for delivery by November 13. The reserve was established to meet only ten days of heating oil consumption in the Northeast. There is very limited scope to lift domestic output: according to the American Petroleum Institute, refinery utilisation is running at 95% to 100%.

Could War Risk Insurance Premiums Signal a Fall in Freight Rates First?

Hull war risk insurance now costs around 5% of a vessel’s value, against 0.25% before the war. That current premium level translates into the $7-per-barrel insurance charge. Ship-to-ship transfers occupy nearly one-sixth of the tankers in the Persian Gulf and Gulf of Oman on any given day. The capacity committed to these transfers will re-enter the market only after that share drops to zero. Such a shift would be accompanied by VLCC daily charter rates retreating from $1.41 million to $210,000.

A record 234 new crude tankers were ordered during the first seven months of this year, representing 60 million deadweight tonnes. Entry into service for these vessels will start in 2027.

An easing of geopolitical tensions could trigger a rapid unwinding of risk premiums, BOC International (China) Securities warns. For Caitong Securities, the central question is no longer “how many ships are available” but “how many voyages each ship can complete in a year.” Updates on Middle Eastern freight rates, the share of tankers occupied by ship-to-ship transfers and VLCC daily charter rates are published weekly; war risk insurance rates are refreshed daily. Traders should keep a close watch on these figures.