【TMGM Financial Recap】Over $20 per Barrel, Versus $3 a Year Ago: Goldman Sachs Highlights Global Crude Shipping Costs, a Key Component of Oil Prices

Global seaborne crude oil freight now costs more than $20 per barrel. A year ago, the average was $3. These are among four figures highlighted by Goldman Sachs in its 20 October report, which puts Middle Eastern routes at $35 per barrel. Three identifiable cost components account for $15 per barrel: $7 for war risk insurance covering the Strait of Hormuz, $4 for fuel and $4 for ship-to-ship transfers in the Gulf of Oman.

Moving one cargo from the US Gulf Coast to China on a very large crude carrier (VLCC) cost $76 million in early October, approximately $38 per barrel. Pre-conflict quotations for that route were $7 million to $10 million. The vessel itself was quoted at $82 million after a 50% price increase in three weeks.

At $90 per barrel, Goldman Sachs’ baseline year-end Brent crude forecast faces three upside risks identified in the report. Freight costs are one; heavier attacks on shipping and damage to oil infrastructure are the other two.

40% of VLCCs: Transfer Queues in and Around the Persian Gulf

A daily time charter equivalent rate of $1.4126 million for VLCCs on the Middle East Gulf–China route (TD3C) was recorded in the Baltic Exchange’s 8 October assessment. For the Middle East Gulf–Singapore route (TD2), the same assessment showed $1.4127 million per day. TD3C has gained approximately 570% from its pre-conflict rate of $210,000 per day.

Buyers’ reluctance to send vessels into the strait has forced oil-producing countries to deploy their own tankers to load crude. Those tankers cross the strait before handing cargoes to vessels stationed outside, in the Gulf of Oman. Two vessels are therefore occupied simultaneously for each cargo, which undergoes two loading and unloading operations. The process adds more than two weeks to a direct voyage. Nearly one-sixth of tankers in the Persian Gulf and Gulf of Oman participate in these operations on any given day. Anchored vessels still accumulate charter costs. Cargo owners ultimately pay for that waiting time through per-barrel charges.

The global fleet numbers roughly 850 VLCCs, with 40% concentrated in or near the Persian Gulf. Lucrative freight rates have pulled vessels from other regions, reducing capacity on the routes they leave behind. Even the recovery of Middle Eastern crude exports to pre-war levels by late September did not produce a matching reduction in freight rates.

The shortage of available VLCCs in the Persian Gulf is lifting daily vessel rates elsewhere. Cargo owners are substituting Suezmax and Aframax tankers, increasing daily charges for both classes. In its weekly report, shipbroker Fearnleys noted no sign that rates for either class were slowing. This diversion of vessels explains the global average freight cost rising from $3 to $20 per barrel. Middle Eastern routes command $35; other routes are cheaper, but their costs have also increased as vessels move elsewhere. Goldman Sachs expects the factors underpinning freight rates to persist while the Middle East conflict remains in its current state.

Daily renegotiation makes war risk insurance an even bigger problem for shipowners than the price increase alone. Before the war, premiums represented approximately 0.25% of vessel value; they briefly hit 10% after fighting began. Broker quotations now span 3% to 10%, with the midpoint around 5%. A ship valued at $100 million thus faces a premium of several million dollars for one passage through the strait, up from $250,000. Some underwriters leave rates unconfirmed until six hours before entry. Cover lasts only three to seven days.

Landed Freight Costs: Refining Margins Take the Initial Hit

Nearly $144 is the landed price paid by refiners when Middle Eastern freight charges of $35 are added to Brent crude’s 21 October close of $108.82 per barrel.

In Goldman Sachs’ report, higher effective landed prices would cut aggregate crude demand among refiners. Suppliers closer to their refineries may also become more attractive, redirecting established trade flows. Landed costs now stand 32% above the benchmark market price; a year ago, the difference was less than 5%. Benchmark hedges cannot lock in the extra $35. Rising freight costs mean smaller crude purchases by refiners and a faster decline in crude prices. For Spain’s Repsol, the reported third-quarter refining margin was $36 per barrel. Market estimates suggest that margin had contracted to around $15 in October.

$100 Diesel Crack Spread: An Extra Layer in Refined Product Prices

October’s approximately $100-per-barrel diesel crack spread compares with a normal $15 to $30 range. To arrive at refined product prices, the crack spread is added to crude oil costs, which already include freight.

A rise of more than 70% year on year brought US retail diesel to $6.2785 per gallon on 9 October. US diesel inventories are the lowest for the season since 1982; European holdings are below their five-year average. The Northern Hemisphere heating season starts next month. Heating oil shares refining units with diesel, while demand has relatively little flexibility. Approximately 2.94 million barrels of diesel per day go to the US transportation sector alone.

Restrictions on Russian diesel imports were eased by the White House on 9 October, with the authorisation valid through 7 April 2027. A further step came on 21 October: a loan of 315,000 barrels from the Northeast Home Heating Oil Reserve, representing one-third of its holdings, with delivery due by 13 November. The reserve was built to supply only ten days of heating oil consumption in the Northeast. Domestic production has very little scope to rise, given refinery utilisation of 95% to 100%, according to the American Petroleum Institute.

War Risk Insurance: The First Indicator to Track for Freight Relief

At around 5% of vessel value, current hull war risk insurance premiums account for the $7-per-barrel insurance charge. The pre-war premium was 0.25%. Ship-to-ship operations involve nearly one-sixth of tankers in the Persian Gulf and Gulf of Oman each day. The capacity absorbed by those operations can return to the market only when that proportion reaches zero. That transition would also bring VLCC daily charter rates down from $1.41 million to $210,000.

A record 234 new crude tankers, totalling 60 million deadweight tonnes, were ordered in the first seven months of this year. Deliveries into service will begin in 2027.

A rapid reversal of risk premiums could follow an easing in geopolitical tensions, cautions BOC International (China) Securities. Caitong Securities sees a change in the central issue: from “how many ships are available” to “how many voyages each ship can complete in a year.” Traders should closely monitor Middle Eastern route freight rates, the proportion of tankers committed to ship-to-ship operations and VLCC daily charter rates, all updated weekly. War risk insurance rates receive daily updates.