Hormuz war risk pushes crude shipping costs sevenfold, squeezes refiners' margins: Goldman Sachs

New Delhi: War-related risks in the Strait of Hormuz and an increase in ship-to-ship transfers account for more than half of the USD 20 per barrel year-on-year rise in global crude oil freight rates, according to a report by Goldman Sachs (GS).

The surge in shipping costs is putting pressure on refiners, particularly in Asia, which rely heavily on crude oil imports from distant suppliers. These refiners may have to pass on the higher costs to consumers or accept lower profit margins.

Brent crude crossed USD 110 per barrel this week and was trading at around USD 111.51 per barrel at the time of reporting. Another crude oil benchmark was trading at around USD 99.31 per barrel.


Goldman Sachs said global crude oil shipping costs are now seven times higher than a year ago. The report noted, "The global average crude freight rate surged above USD 20/bbl from USD 3/bbl a year ago."

The increase in freight rates initially began in the very large crude carrier (VLCC) segment and on Middle Eastern routes but has since spread to all major crude trading routes, with long-distance voyages particularly affected.

While most crude oil benchmarks do not directly include transportation costs, higher freight rates can affect refiners' profitability and influence their choice of suppliers.

According to GS, "high freight rates may reduce refiners margin' overall demand for crude and/or skew it towards more closely located crude supplier."

The report identified five key factors behind the USD 20 per barrel year-on-year increase in average global crude freight rates. These include a USD 7 per barrel war risk premium for crossing the Strait of Hormuz, USD 4 from ship-to-ship transfers outside the Persian Gulf, USD 4 from higher maritime fuel prices, USD 3 from inefficient tanker allocation and increased vessel diversions, and USD 2 from restrictions on the Iranian tanker fleet.

The report said these factors "will likely continue to support global freight rates as long as the conflict on the Middle East persists."

Goldman Sachs said refiners that depend on crude imports from distant suppliers, particularly in Asia, face higher costs.

"Refiners with greater dependence on imported crude from distant suppliers (e.g., refiners in Asia) would have to either pass higher freight costs on to final consumers or accept lower net refinery margins," the report said.

However, passing on these costs to consumers could be difficult in markets where alternatives to oil, such as electric vehicles in China, are widely available, or where retail fuel prices are regulated.

The rise in freight costs has put particular pressure on Asian refiners' profit margins. This could lead to lower refined fuel output and push up global fuel prices.

Meanwhile, crude oil producers that depend on distant buyers may have to offer steeper discounts to maintain demand. In contrast, suppliers located closer to major consumption centres could benefit from a shift in demand.

The report said producers serving distant markets may need to "discount" their crude more heavily, while crude from more centrally located suppliers, such as Brent in north-western Europe and ESPO in Russia, "may gain from some demand reallocation."

Goldman Sachs also highlighted the impact of higher tanker operating costs, driven by rising crew salaries and bunker fuel prices. The report estimated that "global maritime fuel oil prices have increased by nearly $50/bbl, or 70% yoy amid weak exports from the Persian Gulf and Russia and resilient bunker demand from tankers and container ships."