Canal Disrupted Base Oils
Canal Disrupted Base Oils – SINGAPORE – Over the past eight months, a number of incidents have had severe impacts on base oil cargoes, extending delivery times and catapulting freight rates to all-time highs.
Attacks by Houthis on commercial vessels passing Yemen and drought in Panama both profoundly affected marine transportation and the trade of base oils and lubricants, Gulf Oil Marine’s COO, Safiul Gazi, said at the ICIS Asian Base Oils and Lubricants Conference held here late last month.
In June 2023, drought caused by an El Niño weather pattern meant low water levels in Lake Gatun – Panama Canal’s main water source. This led the Panama Canal Authority to restrict the number of ships allowed to pass through the canal daily.
Then, on November 19, 2023, Iran-backed Houthis began attacking commercial vessels in some way connected to Israel passing through the Red Sea. Houthis claimed the attacks were in response to Israel’s bombing of Gaza after Hamas-led militants launched a bloody attack on Israel on October 7.
By February 2024, 40 vessels had been attacked. To avoid passage through the Red Sea and the Suez Canal, hundreds of vessels were forced to sail a much longer route around the southern tip of South Africa, raising not only transit times, but also freight rates.
“We looked at the impact of these disruptions on the base oils and lubricants industry both from the customers’ as well as the suppliers’ side,” Gazi noted, adding that his company also examined the different modes of transportation and vessel sizes to determine which ones were most affected by the crises.
Most bulk products and petrochemicals are transported in smaller carriers such as intracoastal vessels and barges, Handysize and Panamax vessels. Panamax are the largest ships that can pass through the Panama Canal and cover longer routes, such as U.S. Gulf to the West Coast of South America, from the Caribbean and U.S. East Coast across the Atlantic to Europe and North Africa, Intra-Asia and Middle East-Asia. These were the tankers that experienced the most impact from the Panama Canal crisis.
Larger vessels such as Aframax, Suezmax and very large crude carriers (VLCCs) predominantly transport feedstocks on longer routes. Suezmax tankers can sail from Saudi Arabia, Iraq and Iran to Southern Europe, the Middle East Gulf to the Gulf of Mexico, Nigeria/Angola to EU/U.S. East Coast, the Black Sea to the Mediterranean and from Venezuela and Brazil to Gulf of Mexico.
VLCCs and ultra-large crude carriers cover routes from the Arabian Gulf to China, India, Japan and South Korea, the Arabian Gulf to the U.S. Gulf Coast, the Arabian Gulf to Europe, West Africa to China and India, and Brazil to China. These ships were the ones most affected by the Red Sea crisis.
Gazi then analyzed the crude oil trade flows and how different countries may have been affected by the shipping disruptions, depending on the origin, type of crude and import routes they utilize.
The U.S., Latin American and West African crude cargoes were likely not affected by the Suez Canal crisis. “But when one examines other types of crude, such as Kazakhstan’s CPC Blend, Libya’s El Sahara, Algeria’s Saharan Blend, these are always transported in Suezmaxes through the Suez Canal to South Korea, Thailand and Indonesia. Some or all of CPC Blend, Saharan Blend and Libyan crudes may have been redirected through West Africa,” Gazi said.
Russian crude flows to India and China come through the Red Sea, so shipments were partly affected by the crisis, but they are currently continuing. Russian crude is sold at a discount given international sanctions due to the war on Ukraine; the discount compared to Brent crude was assessed at U.S. $17.50 per barrel at the time of the presentation, and the reason this is important is because it might make economic sense to transport around the Cape of Good Hope in South Africa despite the higher freight rates. Indian imports of Russian crude were fairly steady throughout 2023, peaking at about 2.1 million barrels per day in June 2023.
South Korea regularly buys Kazakh CPC Blend and Algerian Saharan Blend, but imports dropped dramatically by October 2023 compared with earlier in the year.
In 2023, Thailand raised its U.S. crude import volumes versus Libyan imports as well, according to statistics from Thailand’s Customs Department, Energy/Policy and Planning Office. Between January and October 2022, Thailand’s imports of U.S. crude reached approximately 70,000 bbl/d and Libyan imports about 40,000 bbl/day. Over the same period in 2023, U.S. crude imports jumped to 110,000 bbl/d and Libyan imports dropped to about 30,000 bbl/day.
Aside from analysing trade flows, Gazi’s team looked at research done by the International Monetary Fund and Oxford University about choke points that affect shipping routes, and came up with a list of choke points where transit increased and decreased, depending on prevailing conditions, and how some shipments were diverted to other routes, impacting feedstock movements and lubricant production.
Vessel movements through points such as the Suez Canal, Bab el Mandeb Strait, Bosphorus and Malacca Strait have been the most affected by the Red Sea crisis, with vessel crossings decreasing significantly. Conversely, the number of vessels sailing through the Cape of Good Hope has increased by about 25 per day.
Average vessel movements through some other choke points such as the straits of Hormuz, Gibraltar, Korea and Dover have been negatively affected as well, but they seem to have recovered. Some other choke points, such as the Taiwan Strait and Magellan Strait, have generally not been affected.
The Panama Canal saw a marked decrease of movements during its low-water crisis, but it has returned to normal operational levels. At the same time, when passages through the Panama Canal decreased, movements through the Strait of Magellan in the southern tip of South America increased.
Perhaps the most easily observed impact of the Red Sea and Panama Canal disruptions was the increase in distance and time for vessels to reach their destination, and this translated into steeper costs.
The distance from Ras Tanura in Saudi Arabia to Rotterdam in the Netherlands through the Suez Canal is 10,358 kilometres. If a ship goes south to traverse the Cape of Good Hope, the vessel must sail 17,975 km, making the voyage 75% longer.
The time needed to cover the alternate routes also surged, with a round trip from India to Europe taking 56 days through the Suez Canal, and 63-66 days traversing the Cape of Good Hope. An increase of 25% of time spent at sea.
The increased time needed to travel the longer distances encouraged vessel operators to raise the vessel speed whenever possible, also resulting in higher fuel consumption and more CO2 emission. The shipping industry has been working hard to cut emissions, so the increase posed a significant problem.
To cover the extra distance and increased speed from 14 knots to 16 knots, a round trip from Singapore to Rotterdam uses 31% more fuel. Although, spiking vessel speeds seen at the start of the Red Sea crisis had eased as of February 2024.
Crude oil deliveries first bore the brunt of extended shipping times, but the ramifications then reverberated down the supply chain to refined products such as base oils. This is what Gazi described as the “bullwhip effect,” similar to a wave that grows larger with every step.
The increased distance and time for a crude shipment to go around the Cape of Good hope equals 10-12 days; then the additional distance and time for base chemicals used to blend lubricants adds another five to seven days; arranging the availability of crude oil and product tankers and containers needs another seven to 14 days. Additionally, delays in base oil shipments of five to seven days and delays in chemical components shipments of 14-21 days all add up to between 41 and 61 days that the supply chain has to deal with.
“So what happens is that every time you go into the market, you place an order and ask your broker to find you a certain size lubricant cargo or even an iso-tank, you will see an extended delivery time. You have an added 41 to 61 days to contend with,” Gazi explained. “In general, a typical safety stock covers 15 to 30 days, so that means that on average you are out of 25 to 30 days of stock.”
Gazi suggested a few ways of mitigating the negative effects of the shipping disruptions. “Some of the lessons learned during the pandemic include the need for flexibility and responsiveness.”
Flexibility entails immediately activating alternates, looking at multiple sources of raw material, multiple formulations and working with partners in case of a shortage of components.
“At the end of the day, it comes down to continuously checking and adjusting to the supply-demand balance,” Gazi said.
He also underscored the need for responsiveness, which requires to address the customers’ needs, and clearly state what the challenges might be so that the customer understands and is prepared for the issues that might arise.
“If every actor along that bullwhip collaborates and coordinates, I think we will be able to get through the crisis,” Gazi concluded.
