Ship Charter Rates on the Rise Due to Red Sea Diversions

Global shippers of crude and fuels are facing increasing booking costs for certain tankers that are taking lengthy diversions to avoid disruptions at the Suez and Panama canals.

Chartering costs for Suezmax tankers, the largest class of oil tankers, have soared as more ships choose to sail around Africa to avoid attacks in the Red Sea. These tankers can carry 1 million barrels of oil and are commonly used for transporting crude from Russia or the Mediterranean Sea to Asia, or from the Middle East to Europe.

Rates for long-range tankers, which can move about 600,000 barrels of oil, have also spiked. These tankers are used to transport crude and fuels such as diesel and naphtha through the Suez and Panama canals. They have been impacted by diversions from the Panama Canal, where record-low water levels have caused delays.

In recent weeks, the shipping industry has been affected by attacks in the Red Sea by Iran-backed Houthi rebels. As the war between Israel and Hamas spreads across the region, panic has arisen, with various vessels being targeted. This has disrupted the market for Suez Canal-specific vessels and smaller ships, while supertankers, which do not rely on canals or shortcuts due to their size, remain unaffected.

This week, provisional charter rates for moving oil from Iraq to the Mediterranean on Suezmax tankers have risen above 90 worldscale points, a significant increase from earlier bookings. Rates for LR-ships from the Middle East to Northwest Europe have also reached their highest levels since January.

The decline in the number of tankers entering the Bab al-Mandab Strait, located at the southern end of the Red Sea, indicates that attacks are already affecting trade flows in the area. This week, the number of tankers entering the strait has dropped by over 40% compared to the average over the previous three weeks.

By Sharon Cho, Elizabeth Low, and Serene Cheong © 2023 Bloomberg L.P.