Oil Shipment Costs Increase 43 Percent After US Blacklists China Tankers

By Chriss Street
Chriss Street
Chriss Street
September 30, 2019 Updated: October 1, 2019

News Analysis

The U.S. blacklisting of four Chinese oil tanker firms for knowingly violating trade restrictions against transporting Iran caused oil shipping rates to increase 43 percent.

Short-term charter rates for oil tankers increased from about $28,300 a day to more than $43,000 per day after the U.S. Treasury Department placed four Chinese very large crude carriers (VLCC) on its “entities list” for transporting Iranian crude oil. The biggest impact hit two marine subsidiaries of China Ocean Shipping (Group) Company (COSCO), which operate more than 1,000 vessels, including 64 crude oil and 98 product tankers.

Following the Sept. 25 release of additional sanctions, U.S. Secretary of State Mike Pompeo said at a press conference during a break in the United Nations General Assembly meeting in New York, “We are telling China, and all nations: Know that we will sanction every violation” regarding doing business with Iran.

New sanctions were imposed on five Chinese nationals and six entities for violating U.S.-led international sanctions by transferring oil from Iran.

The move caused the marine “Protection and Indemnity Clubs” of insurance cooperatives to “pull cover” for liabilities such as collision, damage to fixed and floating objects, harbor towage, wreck removal, salvage operations, and oil spills. Without insurance, most of COSCO’s provisionally-booked oil tonnage customers cancelled.

Nicholas Pardini of Davos Investment Group LLC told The Epoch Times that “pulling insurance cover effectively turns the economic value of China’s supertankers into rusty paperweights.”

The world’s total number of VLCC tankers is about 730. But an estimated 25 of the largest supertankers are currently undergoing extensive exhaust retrofitting to meet the U.N. International Maritime Organization’s 2020 mandatory requirement to cut fuel sulfur content from 3.5 percent to 0.5 percent. Due to the protracted lack of available alternatives, logistics brokers on London’s Baltic Exchange are quoting longer-term VLCC tanker contract rates at about $38,600 a day, about 36 percent higher.

Reuters reported that China’s Unipec made four crude oil VLCC replacement bookings for transit from the Middle East Gulf in compliance with U.S. entity list sanctions. The logistics unit of Asia top oil refiner Sinopec also appears to be complying with the U.S. blacklist by switching to nonsanctioned tankers, including China Merchants-owned AMCL.

With the average supertanker carrying about 2,000,000 barrels of crude oil and taking 70 days to reach major ports such as Shanghai, the higher tanker day rates are effectively forcing the Chinese to pay an extra $1.40 per barrel of crude oil.

The Epoch Times reported that Beijing instructed Chinese oil importers in August to avoid buying U.S. oil and liquefied natural gas to retaliate against tariffs imposed by the United States. But with the attacks on Saudi Arabia’s oil facilities slashing 6 percent of global oil supply, and reserve stocks shrinking quickly, The Wall Street Journal reported that “China International United Petroleum & Chemicals Co. was among the most active charterers last week, booking at least six crude cargos from the U.S. Gulf region.”

Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.

Chriss Street
Chriss Street