The biggest market disappointment this week is yet another false start for Saudi Aramco, and we’re not sure how many more the market will tolerate. Yesterday morning, Riyadh was all set to go ahead with the IPO. By the end of the day, the plug was pulled once again, with delays set to run into weeks and months as Aramco belatedly decided to further examine vulnerabilities in the wake of the September 14 attack on its facilities. This will be a further negative mark on MBS’ reputation. The delay will drag on until Aramco releases its Q3 results, which it’s hoping will give a favorable bump to its valuation. The problem is, no one knows when that will be. In the meantime, weighing on oil prices is China’s economic growth – a determining factor in oil prices due to China’s healthy appetite for importing crude oil – which slowed to 6% year over year for Q3. This is its weakest quarter in over 25 years and below what was expected.
How US Sanctions Can Kill US Crude
US sanctions on Iran and Venezuela were designed to force Iran to fall in line over the nuclear deal and for the Maduro regime to, well, collapse. Neither has happened. What has happened is record-low production for Venezuela and curbed oil export profits for Iran. But the sanctions seem to be hurting the oil industry more than anyone, starting in Asia and trickling all the way back to the US shale patch.
As sanctions begin to spill over into oil tankers, Asia is finding it hard to keep up with exorbitant freight rates – a byproduct of the sanctions.
The US most recently sanctioned units of Chinese shipper COSCO, which manages a fair amount of all oil tankers globally. Oil buyers are now shunning the sanctioned shipper lest they find themselves next on the US naughty list. With COSCO tankers out of the mix, buyers quickly canceled shipments that were supposed to be carried by COSCO. Some booked other tankers, while others who could afford to wait, did so to keep from paying rates that are nearly 3X what they were just a few months ago.
Just days ago, these increased shipping rates added $3 per barrel to oil cargos on the Middle East-to-Asia route, with some routes adding $11 for every barrel. Some Chinese refiners have been operating at net losses as a result. What used to cost $3-4 million per load to move crude from West Africa to China spiked to as much as $9 million.
But the US oil industry may also feel the pain of the sanctions as WTI prices will need to come down to increase the spread between WTI and Brent, in order for buyers to maintain interest as freight rates from the US to South Korea – a top US destination for US oil – hit a record earlier this week of $14 million for every VLCC load of crude, which is the highest price ever.
While freight rates began to ease slightly on Wednesday, they are still high, and US exports to Asia – which were cut in half during the first week of October to just 500,000