Weight of Freight: In for the long haul

It was meant to be a good year for very large crude carriers (VLCCs) — the workhorses of the global tanker market that ferry 2mn barrels of oil at a time, primarily from the Mideast Gulf to China. The easing of Covid-19 restrictions in China was expected to unleash the country’s oil demand at the same time as a low order book kept vessel supply tight and the fallout from the Russia-Ukraine conflict raised global tonne-miles for smaller tankers.

But the Argus time charter equivalent (TCE) earnings for scrubber-fitted VLCCs on the key Ras Tanura to Ningbo route have only been above $70,000/d for around 20pc of this year so far – during a four-week stretch in March. TCE earnings have only been above $100,000/d for one week. As of 9 May, TCE earnings on the route were under $22,000/d, as rates reached one-year lows in the Mideast Gulf and US Gulf.  

The obvious culprit for the recent slowdown is cuts by some members of the Opec+ oil exporter group, which came into force this month. The lion’s share of the cuts are from countries in the Mideast Gulf — the primary loading spot for VLCCs — namely Saudi Arabia, the UAE, Kuwait and Iraq.

This likely led to a drop in demand for the large tankers to load in the Mideast Gulf, but opportunity has emerged elsewhere. The Opec+ decision was in part spurred by a sharp drop in Atlantic basin benchmark North Sea Dated prices in early March, as a banking mini-crisis developed and gave price-sensitive buyers in China the opportunity to buy relatively cheaper US Gulf and Brazilian crude.

Voyages to China from the US and Brazil take about 53 and 37 days, respectively, compared with about 21 days from the Mideast Gulf. An increase in these longer-haul voyages — providing Brazil and the US exports remain high — could boost VLCC tonne-miles and stretch out limited tonnage supplies, putting upward pressure on rates. There are already signs that rates are recovering. Argus assessed the 270,000t US Gulf to China rate at $32.41/t on 15 May, over $8/t higher than on 10 May.

And more VLCCs are staying in the Atlantic, transporting crude to Europe to replace lost Russian barrels. While shorter, these voyages may tighten tonnage supplies on the traditional routes to China.   

But Atlantic basin crudes still face stiff competition from growing supplies of Russian oil to China from the far eastern port of Kozmino or from the Baltic and Black Seas — which are primarily carried on Aframax and Suezmax tankers rather than on VLCCs. 

And there are concerns on the other side of the equation as well — planned refinery maintenance has hit China’s crude imports in the short term and there are signs that China’s economy — and its insatiable demand for oil — may not be what it once was. The country’s manufacturing activity expanded at a slower pace in March, while its crude imports dipped significantly in April. 

Dangerous waters

The dramatic increase in the size of the so-called dark fleet of older tankers transporting Russian, Iranian and Venezuelan oil around the world has become a major cause of concern, as a recent explosion onboard the 26-year-old Pablo near Singapore has shown. The vessel was known to have previously carried Iranian oil and was likely uninsured at the time of the accident.

Elsewhere, the recent seizure by Iran of three vessels in the Mideast Gulf could discourage some owners from visiting the region unless tensions ease. And more than half of the 22 tankers in the fleet of Venezuela’s state-run oil company PDVSA need urgent repairs or should not trade, according to an internal report seen by news agency Reuters.

Despite these dangers, VLCCs may fare better in the second half of this year. An historically low order book will eventually tighten the supply of vessels, as older vessels are scrapped without new ones being built to replace them.

China will remain the main driver of global oil demand and the VLCC market, even if at a slower pace, as more long-haul voyages support rates. Opec+ has said that the latest cuts could be rolled back — individually or collectively — leaving scope for production to rise before the end of this year. As we move into summer, there are signs that this could still be a good year for VLCCs. 

Author Matthew Mitchell, Market Reporter - Freight