If you live in a port city like Saint John, you see oil tankers moving through the harbour regularly. Right now, a massive bottleneck in the global shipping industry is changing what those ships carry and where they go.

Dense heavy crude oil is piling up across North and South America. At the same time, buyers in Asia and Europe face severe supply shortages. This unusual split in the global oil market comes down to one major factor: skyrocketing freight rates.

Source: CTV News

The Freight Squeeze

Heavy crude provides a denser type of oil. Refineries favor it because it costs less than light crude and yields more diesel fuel. When shipping costs are low, producers in the Americas export this oil to Asia and Europe to balance the market.

Today, shipping costs break records. The cost to hire a supertanker from the United States Gulf Coast to Asia quintupled since February. A voyage that cost 15 million dollars early this year now costs over 80 million dollars. Shipping to Europe now costs around 46 million dollars.

Energy specialist Scott Shelton explained the situation clearly to CTV News.

“It is all freight,” Shelton said. “You need a ship and the price of ships are going up, and the availability ships are going down.”

Refineries Hit Their Limits

You might wonder why local refineries do not just process this cheap stranded oil. The answer is capacity.

Refineries in the United States are operating at 93.5 percent capacity. This is the highest level in 28 years. They are producing as much fuel as possible to profit from high diesel prices. However, these facilities can only process a specific percentage of heavy crude before they max out their specialized equipment. Gulf Coast refiners have already bought as much heavy crude as they can handle.

Plunging Prices for Heavy Crude

With exports stifled and local refineries full, the price of heavy crude is dropping. Flagship Canadian, Colombian, and Ecuadorian heavy crude grades fell by more than 10 dollars a barrel recently. Western Canada Select traded around 74 dollars a barrel excluding shipping and insurance costs.

This creates a frustrating scenario. The Americas have an abundance of cheap oil that yields high amounts of diesel. Meanwhile, diesel starved markets in Europe and Asia cannot access it because moving it across the ocean costs too much.

Frequently Asked Questions

Why is heavy oil piling up in the Americas?

Heavy oil is piling up because the cost to ship it to other continents is too high. Local refineries are already processing as much as they possibly can.

Why do refineries want heavy crude oil?

Refineries want heavy crude because it is usually cheaper than light crude. It also produces a higher yield of diesel fuel.

How much have shipping costs increased?

The cost to send a supertanker from the Americas to Asia rose from around 15 million dollars to over 80 million dollars since the start of the year.

Can North American refineries process the extra oil?

No. Refineries are currently running at their highest capacity in 28 years. They have strict limits on how much dense heavy crude their equipment can process at one time.