Total volumes of US-origin crude exports are expected to see minimal impacts from spike in US Gulf Coast-loading VLCC freight rates of more than 128% since September 25, as a combination of geopolitical and pre-IMO 2020 factors reduced the VLCCs fleet capacity by 15%. Marginalized VLCC tonnage includes 42 COSCO units following US sanctions on two affiliates of COSCO Shipping Co. and 38 VLCCs owned by the National Iranian Tanker Company, an S&P Global Platts Analytics Spotlight report showed Monday. It also includes 24 VLCCs currently used for floating storage of low-sulfur bunkers or low-sulfur blending components to facilitate the switchover from 3.5% sulfur to 0.5% sulfur bunkers by January 2020, and 20 units currently dry docked for scrubber installations ahead of the IMO 2020 deadline.

Yet, the initial spark that fueled the pre-IMO 2020 storm were the US sanctions on tonnage of COSCO Shipping Tanker (Dalian) and COSCO Shipping Tanker (Dalian) Seaman & Ship Management Co., which sent the cost of taking VLCCs out of the USGC to unprecedented highs over the past two weeks. S&P Global Platts on Tuesday assessed freight for the key VLCC 270,000 mt USGC-China route at lump sum $18 million, up 128% from September 25 — the day before the sanctions news emerged — after peaking at $21 million on Monday.

The arbitrage window for bringing US-origin crude into Asia Pacific markets remains adamantly shut since VLCC freight hit $20 million on October 11, Platts Analytics data showed. Arbitrage opportunities for other key crude grades such as West Africa-loading Bonny Light and Persian Gulf-loading Murban also remain firmly shut.¬†“If freight rates stay this high then US crude prices will have to fall,” Sandy Fielden, Director, Oil Research, Morningstar Commodity Research, said last Thursday at the Crude Oil Quality Association conference in Dallas. “No one is going to buy crude that is more expensive than what is available in their immediate region. It’s a world market and the only way for us to compete is through price.”¬†The economics of taking US-origin crude will have to adjust to keep export barrels moving, likely leaving FOB prices to absorb the increase in freight, according to Platts Analytics.