【TMGM Financial Recap】A Key Component of Oil Prices! Goldman Sachs: Global Crude Shipping Costs Exceed $20 per Barrel, Up from $3 a Year Ago

Goldman Sachs’ October 20 report highlights four figures: average global seaborne crude oil shipping costs now exceed $20 per barrel, compared with $3 a year ago; Middle Eastern routes cost $35 per barrel; and three identifiable components—$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—total $15 per barrel.

In early October, the total cost of shipping a cargo aboard a very large crude carrier (VLCC) from the US Gulf Coast to China reached $76 million, equivalent to approximately $38 per barrel. Before the conflict, quotes for the same route ranged from $7 million to $10 million. Meanwhile, the price of a VLCC was quoted at $82 million, up 50% in three weeks.

Goldman Sachs’ own year-end baseline forecast for Brent crude is $90 per barrel. The report identifies freight costs as an upside risk to that forecast, alongside two others: more intense attacks on shipping and damage to oil infrastructure.

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

According to the Baltic Exchange’s October 8 assessment, the time charter equivalent rate for VLCCs on the Middle East Gulf–China route (TD3C) reached $1.4126 million per day. On the same day, the Middle East Gulf–Singapore route (TD2) stood at $1.4127 million per day. Before the conflict, the TD3C rate was $210,000 per day, meaning it has risen by approximately 570%.

With buyers’ vessels unwilling to enter the strait, oil-producing countries send their own tankers in to load crude. After passing through the strait, these tankers transfer their cargoes to vessels waiting outside in the Gulf of Oman. A single cargo now requires two loading and unloading operations, tying up two vessels simultaneously and extending the journey by more than two weeks compared with a direct voyage. On any given day, nearly one-sixth of the tankers in the Persian Gulf and Gulf of Oman are engaged in these operations. Charter costs continue to accrue while vessels wait at anchor, and that waiting cost is ultimately passed on to cargo owners on a per-barrel basis.

Of the roughly 850 VLCCs worldwide, 40% are in or near the Persian Gulf. High freight rates have also drawn vessels away from other regions, tightening capacity on other routes. By late September, Middle Eastern crude exports had returned to pre-war levels, but freight rates had not fallen accordingly.

Daily rates for vessels serving other routes are rising too. With VLCCs tied up in the Persian Gulf, cargo owners are turning to Suezmax and Aframax tankers, pushing up daily rates for both vessel classes. Shipbroker Fearnleys wrote in its weekly report that rates for these two classes showed no signs of slowing. This is how average global freight costs have climbed from $3 to $20 per barrel: $35 is the rate for Middle Eastern routes. Other routes cost less, but they have become more expensive as vessels are diverted elsewhere. Goldman Sachs’ assessment is that the factors supporting freight rates will persist as long as the Middle East conflict remains in its current state.

An even greater headache for shipowners is that war risk insurance is more than simply becoming more expensive: rates must be renegotiated every day. Before the war, premiums were approximately 0.25% of a vessel’s value. After the conflict broke out, they briefly reached 10%. The current midpoint is around 5%, with insurance brokers quoting a range of 3% to 10%. For a vessel worth $100 million, the premium for a single passage through the strait has risen from $250,000 to several million dollars. Some underwriters will only finalize the rate six hours before a vessel enters the strait, and policies provide coverage for just three to seven days.

Freight Is Part of the Landed Cost, and Refining Margins Are the First to Be Squeezed

Brent crude closed at $108.82 per barrel on October 21. Adding $35 in freight costs on Middle Eastern routes brings the landed cost to nearly $144. That is the price refiners pay.

Goldman Sachs wrote in its report that higher effective landed prices would reduce refiners’ overall demand for crude. Refiners may also turn to suppliers closer to home, reshaping existing trade flows. The landed cost is now 32% higher than the benchmark market price, compared with a gap of less than 5% a year ago. Refiners hedging against the benchmark price cannot lock in the additional $35. The higher freight costs rise, the less crude refiners buy, and the faster crude prices fall. Spain’s Repsol reported a third-quarter refining margin of $36 per barrel, but market estimates suggest it had narrowed to around $15 in October.

Refined Products Add Another Layer Through Crack Spreads, With Diesel Already at $100

The diesel crack spread stood at approximately $100 per barrel in October, compared with a normal range of $15 to $30. Refined product prices consist of crude oil costs plus the crack spread, with freight already included in the initial cost.

US retail diesel prices reached $6.2785 per gallon on October 9, up more than 70% year on year. US diesel inventories are at their lowest seasonal level since 1982, while European inventories are below their five-year average. The Northern Hemisphere’s heating season begins next month, and heating oil and diesel are produced by the same refining units. Demand is relatively inflexible: the US transportation sector alone consumes approximately 2.94 million barrels of diesel per day.

On October 9, the White House eased restrictions on Russian diesel imports, with authorization running through April 7, 2027. On October 21, it also loaned 315,000 barrels from the Northeast Home Heating Oil Reserve—one-third of the reserve—with deliveries due by November 13. The reserve was designed to cover just ten days of heating oil consumption in the Northeast. According to the American Petroleum Institute, refinery utilization rates are at 95% to 100%, leaving very little room to increase domestic production.

For Signs of Lower Freight Rates, Watch War Risk Insurance Premiums First

Before the war, hull war risk insurance premiums were 0.25% of a vessel’s value. They are now around 5%, and the $7-per-barrel insurance cost corresponds to that premium level. On any given day, nearly one-sixth of the tankers in the Persian Gulf and Gulf of Oman are engaged in ship-to-ship operations. Only when that proportion falls to zero will the capacity tied up in these operations return to the market. A decline in VLCC daily charter rates from $1.41 million back to $210,000 would accompany that shift.

In the first seven months of this year, new crude tanker orders reached a record 234 vessels, totaling 60 million deadweight tonnes. These vessels will begin entering service in 2027.

BOC International (China) Securities cautions that risk premiums could unwind rapidly once geopolitical tensions ease. Caitong Securities believes the central issue has shifted from “how many ships are available” to “how many voyages each ship can complete in a year.” Freight rates on Middle Eastern routes, the proportion of tankers engaged in ship-to-ship operations, and VLCC daily charter rates are updated weekly, while war risk insurance rates are updated daily. These are figures traders should monitor closely.