Oil prices have risen sharply this year. The U.S. Bureau of Labor Statistics showed that the energy index rose 5.2% in September alone. As fuel prices rise, other consumer goods tend to become more expensive.
The increase in fuel prices is closely related to transportation costs.
In a research note Goldman Sachs shared with me, the bank’s commodities team, led by Yulia Zhestkova Grigsby, said the average cost of transporting a barrel of crude oil has climbed $20+. Just a year ago, the same trip would have cost just $3. This means that shipping costs increased approximately sevenfold during this period.
The main reason for this is the tension surrounding the Strait of Hormuz. Attacks on tankers have pushed up insurance costs, which in turn has pushed up freight rates.
Why shipping oil became so expensive this year
The Strait of Hormuz is a narrow body of water between Iran and Oman through which about one in five barrels of global oil passes, according to EIA data. So when the region becomes a war zone, shipping lines around the world charge higher fees to account for the risks and possible route changes.
Also read: Energy minister warns diesel ban will raise petrol prices
Goldman Sachs says risk of war in Hormuz alone has increased About $7 per barrel to shipping costs. That’s about a third of the total price increase. Risks are rising due to “the recent escalation of attacks on oil tankers in Hormuz,” the team wrote, pushing up insurance costs and crew wages.
Other factors are also driving up shipping costs. Tankers now exchange cargo at sea, a practice known as ship-to-ship transfers. Kpler said this extends the time it takes for ships to make a round trip to 23 days instead of the optimal 10 days.
The ships themselves also require nearly 70% more fuel than last year, and the U.S. blockade of Iranian oil tankers has caused another large group of ships to stop sailing.
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How the transportation surge affects everyone
Higher transportation costs affect drivers and homeowners through factors such as gasoline and heating fuel prices. It also affects refineries, especially those in places that rely on oil from far away.
Goldman Sachs pointed out that Asian refineries were hardest hit by the price increase. The report mentioned that China buys about half of its crude oil through long-distance travel, while other Asian countries buy about 80% of their crude oil this way.
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When freight rates become expensive, refiners either recoup their losses or charge drivers more. The bank said “passing on costs is more challenging when ultimate oil demand is more flexible,” which is the case in China where electric vehicles are now a popular choice.
Fuel prices around the world tend to move in sync, so if Asian refiners cut output because they are unprofitable, that could lead to shortages and prices could rise everywhere.
Tanker stocks could benefit from rising interest rates
Investors often look to tanker companies to benefit from rising shipping costs, with some well-known names standing out. For example, front (FRO) has one of the largest fleets of VLCCs. VLCCs are the main vessels transporting oil through Hormuz.
Related: 16 shipping companies file for bankruptcy in 30 days
scorpio tanker (STNG) is another option that investors often consider. It focuses on small tankers transporting finished fuels such as gasoline and jet fuel. If you don’t want to be limited to large or small tankers, some investors like international waterway (INSW) Because it has both.
What investors should consider before buying tanker stocks
Tanker rates depend on world events that no one can predict. Therefore, if a peace deal is reached in the Middle East, or the U.S. blockade on Iran ends, freight rates may fall within weeks.
Goldman Sachs predicts that Brent crude oil prices will average US$90 per barrel by the end of the year and US$80 per barrel next year, citing high transportation costs as the main reason for maintaining high oil prices. Investors should keep an eye on how many tankers remain stuck in ship-to-ship transfers and the pace of Persian Gulf oil exports. If these restrictions are relaxed, the shipping boom could fade quickly.
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