Tanker rates to India explode 150%—here's what it means for oil prices

Shipping costs for bringing crude oil to India have jumped sharply as worsening tensions around the Strait of Hormuz and the Red Sea disrupt tanker movement.

Daily charter rates for tankers headed to India have climbed to around $2,50,000, more than double the roughly $1,00,000 level seen about two weeks ago, according to three people familiar with the developments.

Shipping costs climb amid regional disruptions

The increase followed the seizure of Yemen's Mocha port by Iran-backed Houthi forces and their advance towards the Bab el-Mandeb Strait, a key route for global shipping.

Bunker fuel prices have also risen 50 per cent to about $900 a tonne, while insurance costs have increased 20 per cent, further raising the expense of transporting crude.

“The situation has completely reversed over the past week,’’ said Anil Devli, CEO of the Indian National Shipowners’ Association (INSA). “Seafarers are now worried to take the Strait of Hormuz route. There was some movement earlier, but now there is none, as now both ships are being attacked and sunk, shippers killed, while earlier they were mostly disabled and not allowed to move,” he said.

Longer routes could push up oil prices

A possible Houthi takeover of the Bab el-Mandeb could force tankers carrying Saudi Arabian oil to use the Suez Canal route instead. That would add around two weeks to the journey and potentially increase shipping and crude costs.

Brent crude is already trading near $105 a barrel, around a four-month high. West Asia accounts for about 30 per cent of India's current oil and gas imports.

Devli said tanker rates had been around $70,000-80,000 a day roughly two months ago.

Higher freight costs add to India's import burden

India's crude import bill reached $63.37 billion during April-July of the current fiscal year, 56 per cent higher than the corresponding period a year earlier. The country spent $123 billion on oil imports in the previous fiscal year. India's crude basket was last recorded at $115.98 a barrel on September 9.

“The latest uncertainty in West Asia threatens to halt the revival of supplies and the eventual rise in prices adds to the supply constraints, as there are instances of Russian crude also being sold at a premium,” said an executive with a refiner.

“There is very limited movement of ships around the Strait of Hormuz and the little that moves, paying hefty war risk premium that has also gone up further high over the already elevated levels,” said a UAE-headquartered logistics major DP World executive.

The Centre had launched the $1.5 billion Bharat Maritime Insurance Pool in May to support continued maritime insurance coverage. However, an Indian shipping company executive said its vessels are currently not using the affected routes and therefore are not using the insurance facility.