(Bloomberg) – West African crude oil traders are struggling to compete due to rising shipping costs and a less favorable pricing structure, which is affecting demand from buyers in Asia.
Shipping oil to customers in Asia and Europe is costing more than ever, causing a dip in prices for supplies from this region. As of Friday, the main shipping rate for Asian customers reached its highest level in over five years.
High freight costs are compounded by an increase in a key pricing spread known as the Brent-Dubai Exchange of Futures for Swaps (EFS). This spread has made supplies from West Africa, the North Sea, and the Mediterranean — all priced against the global benchmark Brent — less appealing to refineries in Asia.
Neil Crosby, an oil analyst at Sparta Commodities SA, noted, "If the EFS doesn't change, then West Africa prices will have to adjust." He added that the high shipping costs for long-distance deliveries to the East, combined with the EFS, make trading from West to East challenging.
Nigerian crude prices dropped last week and are expected to decrease further, according to Crosby. Sales to Europe are also affected, as the refinery maintenance period is reducing crude demand there.
A cargo of Djeno crude from the Republic of the Congo was offered for sale by Trafigura at $5.40 per barrel below the Dated Brent benchmark late last week, during a major pricing window managed by Platts, an S&P Global unit. This price is weaker than February's sales, which ranged from $3 to $4 below the same benchmark, but no buyers stepped forward.
Shipments from other West African suppliers like Angola and Nigeria have also been showing weaker pricing in recent weeks, according to traders.
The rising freight costs reflect a general increase in shipping expenses driven by higher supply levels, including Venezuelan oil returning to the market, and the potential for conflict between the US and Iran.
Because of the increased shipping costs, Indian refiners are favoring shorter deliveries from the Middle East over more expensive West African supplies.
The Brent-Dubai EFS reached as high as $2 per barrel on Friday, a significant rise from the premiums of below 50 cents per barrel seen for most of the last quarter of last year, based on data from PVM Oil Associates Ltd.
Typically, the Brent component of the spread grows larger compared to Dubai when geopolitical tensions rise, partly due to Brent's greater liquidity, according to Crosby from Sparta, "even when all the supply risks are linked to Dubai crude."
On a broader scale, the daily earnings for supertankers on the Middle East Gulf-to-China route climbed to $157,358 on Friday, marking the highest rate since April 2020.
A note from New Delhi-based broker Shiplinks mentioned, "Tight supply, controlled fleets, and heightened geopolitical risks are likely to maintain higher rates unless there is a significant slowdown in cargo flow."