Surging freight costs in the West African Suezmax market, which have climbed to their highest levels in over six years this week, could add to the bearish pressure on crude differentials in the region, traders said.
“With freight and margins as they are, the market should be lower than December,” a crude trader said.
Rates for the WAF to UK Continent route were assessed by Platts at Worldscale 145 Thursday, up w62.5 in a week, after peaking at w152.5 Wednesday. Wednesday’s value translated into $30.13/mt, the highest dollar per mt cost in the market since early-August 2008.
Market sources said that West African crude differentials, which price on an FOB-basis where freight costs are not already factored in, are likely to have to continue to correct lower to account for the pricing risk of volatile freight.
Crude differentials in both the Angolan and Nigerian crude markets have remained largely unchanged this week due to the release of fresh programs for January, but sources said that buying interest, particularly for the remaining December Nigerian crude cargoes, has shifted slightly lower.
“You will see some pressure on diffs,” a crude trader said. “Mainly on the remaining Qua Iboe cargoes. There were quite a few that were aiming at storage in South Africa, but with the narrower contango, and higher freight, I’m not sure it’s still economical to store.” As the same pool of ships often compete for cargoes in both the Mediterranean and West African regions, delays in the Turkish straits during the past two weeks have tightened position lists in both the Med and WAF.
Delays in the straits were assessed at five days in each direction on Thursday.
This, coupled with a strong flow of cargoes, caused the spike in WAF Suezmax rates this week.
With a severe shortage of Suezmaxes available in WAF, charterers have begun to employ the larger VLCCs to transport Suezmax stems from WAF to the UKC. Shipping sources say that seven VLCCs have already been booked by charterers in WAF between December 11-24, with several more charterers said to be in the market attempting to secure VLCC tonnage.
However, shipping sources said that the shift in demand towards larger vessels could ultimately make the spike in Suezmax rates short lived.
“It feels like the w150 type rates for WAF-UKCM on the Suezmaxes aren’t there any longer. A short, sharp correction is on the cards today, tomorrow…soon,” said a charterer.