Key facts
- Freight costs now account for about a fifth of the price of a crude cargo.
- VLCCs waiting for ship-to-ship transfers in the Strait of Hormuz reportedly spend around 10 days in queues.
- The Hormuz shuttle to Fujairah or Sohar adds around $15-20/bbl to crude costs.
- VLCC earnings on the Middle East-to-Asia route have reached over $1.2 million a day.
- A VLCC voyage from the US Gulf Coast to Japan costs approximately $53 million.
- Japan imported 860,000 barrels per day from the US in August, representing 35% of its total imports.
Crude oil prices are being significantly driven by escalating freight costs, making Japan's imports the most expensive globally. The cost of transporting oil now represents approximately one-fifth of the total expense for a crude cargo, with the tanker market playing a crucial role in the final price paid by refiners.
The surge in freight costs is largely attributed to the increased demand for Very Large Crude Carriers (VLCCs), supertankers capable of carrying about 2 million barrels. Disruptions in the Gulf and Red Seas have forced vessels to undertake longer voyages as refiners seek supplies from more distant locations. For instance, Indian buyers are now chartering ships for journeys to Guyana and Brazil, which can last 30 to 40 days.
Furthermore, the Strait of Hormuz has become a bottleneck, with many VLCCs engaged in short, costly shuttle runs. Approximately 60 vessels are involved in ship-to-ship (STS) transfers in the Gulf of Oman after transiting the strait. These transfers, which involve VLCCs waiting in queues for about 10 days, tie up significant capacity. The cost of this initial short passage through the Hormuz strait can add $15-20 per barrel to the crude cost, amounting to about $20 million for a fully loaded VLCC.
Daily earnings for VLCCs on the Middle East-to-Asia route have surged to over $1.2 million, a stark contrast to the approximately $150,000 seen in February. Rates between the Middle East and China have doubled since the end of summer. For countries at the end of long supply chains, like Japan, these increased transportation costs are becoming increasingly difficult to absorb.
A VLCC voyage from the US Gulf Coast to Japan now incurs a lump sum cost of about $53 million, or roughly $26-28 per barrel. This has significant implications for Japan's export strategy, especially as the US has become its largest crude supplier since March. Japan imported 860,000 barrels per day from the US in August, a substantial increase from February, with these cargoes often sailing around the Cape of Good Hope, a journey averaging 50 days.
While Saudi Arabia and the UAE remain key suppliers, their combined share of Japan's crude imports has decreased to around 50% from 80-90% before the recent conflicts. Japan is also exploring longer routes, such as shipping Saudi crude from Yanbu through the Suez Canal and around the Cape of Good Hope, a trip that can take 60-65 days.
Japan's need to replenish its strategic oil reserves, which were drawn down during the initial phase of the crisis, adds further pressure to the already expensive market. The government aims to restore reserves to approximately 90 days of cover by fiscal year 2027, requiring the replenishment of about 48 million barrels. State energy agency Jogmec has already begun purchasing crude for this purpose.
Meanwhile, the US faces limitations on further Strategic Petroleum Reserve (SPR) releases. The US reserve has decreased significantly, and the Energy Policy and Conservation Act sets a floor for withdrawals, leaving limited room for further significant releases. US crude exports have also eased, with volumes previously directed to domestic refiners now needing to be substituted by those previously exported, including to Japan. The US is also facing competition from South Korea for these limited export cargoes.
These converging pressures—longer supply routes, high shipping costs, reserve replenishment needs, and increased competition for US crude—pose a significant challenge for Japan. As voyages lengthen and tankers remain tied up, the VLCC shortage and associated freight bills are set to become a critical supply challenge for the region.