Clean tanker freight premiums rise amid Red Sea attacks

Clean tanker freight premiums have surged within days of ship owners inserting the option via Cape of good Hope to move cargoes on the Persian Gulf-Europe routes, market participants said Dec. 19-20.

Even though this option has barely been exercised but its mere insertion and deep security concerns along with tight supply of tankers has sent freight sky rocketing to one of its highest levels for the year.

"Market is already factoring in a situation where longer voyages will tighten supply further," one of the charterers for Long Range, or LR, tankers said.

The longer voyages via the Cape command a premium and it has more than doubled in the last few days, sources said.

"The premium is a function of the market. If the daily earnings go up for a route, to get the same income, premium also has to be adjusted accordingly," said a source with a clean oil tankers owner.

On the LR2 tankers that carry up to 90,000 mt of cargoes, the Cape route is commanding a premium of a whopping $950,000, more than double of $400,000 on Dec. 15, brokers said. The corresponding increase in case of LR1 premium is estimated at $750,000-$900,000 from $350,000-$400,000 at the end of last week, they said.

The flurry of attacks on commercial ships moving commodities across the Gulf of Aden in the Red Sea has resulted in almost all owners now looking at longer route of Cape of Good Hope as a more secure voyage option from the Persian Gulf to Europe and it is already pushing up the cost of transportation significantly, without even being actually used. This is because the freight for the more popular and shorter Suez Canal route is also going up.

The Cape option can be exercised by the ship owning company at its own discretion but at the charterer's expense, if the master and the crew think the security situation so warrants, sources said. The additional freight will be borne by the charterers, they said.

As overall freight has gone up due to the paucity of tankers, so has the additional Cape premium, the same source with an owner said.

In a cascading impact, the rising freight for westbound voyages is also supporting the rate for moving naphtha from the Persian Gulf to East Asia. Platts, part of S&P Global Commodity Insights, Dec. 19 assessed the benchmark Long Range II, or LR2 at w185, up w16 day on day on the Persian Gulf-Japan route. LR2 owners are earning more than $65,000/day on round trip basis on the Persian Gulf-UKC routes and are making very high offers for eastbound voyages, to garner similar returns, said a chartering executive with a global commodities trading company.

If the tankers move via the Cape, owners earn higher for a longer duration and therefore seek similarly higher freight for eastbound voyages as well, the executive added.

The Persian Gulf-Europe voyages via Cape can be 11-15 days longer than the more commonly used Suez Canal depending on speed and engine type.

To slow down the rise in freight, charterers are instead trying to do deals among themselves offering relets to each other, sources added.

They fear that the longer and costlier voyages may become the order of the day, if security risks are not mitigated.

A US-led naval task force will be deployed around the Red Sea to deter further maritime attacks by Iran-backed Houthi militants in Yemen that have put energy traders on notice and prompted major oil and shipping firms to avoid the critical waterway linking European and Asian markets.