March 24, 2020 [Reuters – Published on March 19, 2020] – Saudi Arabia and Iraq have said they are unable to provide freight rebates for crude oil shipments under default contract terms due to a record rise in tanker rates, documents seen by Reuters showed on Thursday.
Changes in supply terms may lead to cancellations of April cargoes by buyers across the world as they were not expecting to bear transport costs in full, traders said.
The development came after Saudi Arabia rushed to book a record number of tankers after it opened its taps and pledged to flood markets with additional oil as part of its stand-off with Russia.
But the move may have backfired as tanker rates soared well above expectations. Rates for supertankers have rocketed up to record levels of over $200,000 a day in recent days, raising overall costs.
Saudi Aramco told its customers in Europe it will cut compensation payments for freight costs because of extraordinary conditions in the freight market, according to a memo sent to customers on Wednesday and seen by Reuters.
“In a reference to a Saudi Aramco Freight Protection Policy, kindly note that due to current extraordinary freight market conditions, the freight protection calculation will be limited to 10% of the Saudi Aramco official selling price,” the note said.
Saudi Aramco declined to comment. The freight protection policy applies to refiners in Europe which receive compensation for the transport costs between Ras Tanura in Saudi Arabia and Sidi Kerir in Egypt, traders said.
According to two traders, the cost of the journey between the two export ports is estimated at $3-$4 per barrel, which makes a big difference for either party.
“It does make the oil slightly less attractive if you are looking to compare it to other grades as such. At the same time, it’s unclear if this will mean less purchases,” said Richard Matthews, head of research with ship broker E.A. Gibson.
“Tanker market rates will remain firm for the time being and much will depend on the volumes the Saudis push into the market in coming days.”
Iraq’s Oil Marketing Company (SOMO) has also informed its customers it is unable to compensate for the jump in freight costs for cargoes heading to Europe and the Americas in April, a copy of a notice seen by Reuters showed on Thursday.
The decision was made because of “the dramatic and unprecedented changes in the freight rates in parallel with the steep drop in crude oil prices,” the company said in the notice that was issued to customers.
Freight costs jumped globally because more ships are needed to deliver oil after Saudi Arabia and other Middle East producers ramped up output after talks to extend a production cut deal between the Organization of the Petroleum Exporting Countries and Russia broke down.
SOMO could not be immediately reached for comment. SOMO had been offering buyers for cargoes to Europe and the Americas a rebate if freight costs rose above a certain level, sources with knowledge of the matter said.
The rebate was aimed at gaining market share in those regions, they said. The people with knowledge of the matter declined to be identified because of the sensitivity of the matter.
SOMO’s decision to revoke the rebate has caught buyers off guard as April-loading cargoes have already been allocated and traded in the market, the sources said.
In its notice, SOMO recommended that customers who also have refineries in Asia should move their cargoes to the east instead of west.
SOMO could also review nominations for April cargoes that it had received earlier if it could not reach an agreement on the freight rebate with customers, it said in the notice.
“It’s obvious that buyers in Europe and the Americas won’t choose (Iraq’s) sour crude as they can buy cheaper oil from Russia and the United States,” one of the sources said.
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