According to a Reuters report, shipping sources have said that a surge in demand to ship the flood of crude oil unleashed by Saudi Arabia and its OPEC peers is sending freight rates surging and forcing buyers to seek out space on smaller tankers with the largest ones booked.
What happened?
Freight charges to ship oil in Suezmax tankers, which can hold about 1 million barrels, have in some cases increased ten-fold amid a shortage of very large crude carriers (VLCCs) capable of carrying as much as 2 million barrels of oil, the sources said.
Earlier in March, the Organization of the Petroleum Exporting Countries and its allies, including Russia – together known as OPEC+ – failed to reach an agreement for deeper production cuts to support prices hit by the coronavirus outbreak, sending global oil prices plunging and threatening to overwhelm global oil markets with supply.
Ramping Up Production?
Saudi Arabia pledged to ramp up production and booked numerous carriers to ship crude worldwide, kicking off a price war against Russia and U.S. shale companies. The country’s National Shipping firm, Bahri, snatched up about 24 VLCCs since last week; it had provisionally chartered up to 31 supertankers by last Friday, with at least five of those headed to the United States.
Crude Shipping Cost Rise
- The cost of shipping crude oil on a Suezmax from the Middle East Gulf to India jumped to about $200,000 per day by Friday, up from about $20,000 per day in the week before, according to shipbrokers.
- Rates for supertankers on the Middle East Gulf to the U.S. Gulf route soared to $277,790 a day on Monday, rising nearly $4,000 a day from Friday.
- Baltic Exchange data showed. Rates on the Middle East Gulf to China route rose over $7,000 a day to $250,354 a day, Baltic data showed.
Why this sudden booking rise?
“Bahri has wiped out the VLCC population for March lifting in less than a week which is why people are having to break up their loadings into Suezmaxes,” said Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore.
Broker Clarksons Platou Securities said on Monday that in times of increased Saudi production, Bahri would charter tankers from the market in addition to its own fleet of 41 VLCCs. During 2017 to 2019, Bahri only booked 10 VLCCs per year on average.
“Its actions over the past week clearly indicate a massive boost to oil output is underway, and many of these cargoes are headed long-haul to the U.S.,” the broker said.
Global Gloom Pushes Bookings
The bookings frenzy comes amid an increasingly gloomy global economic outlook and slowing fuel demand the coronavirus pandemic paralyses travel and supply chains.
“I have never seen a market rising on the back of a recession threatening,” said Sharma.
VLCC tanker rates last surged in October last year in the aftermath of U.S. sanctions on units of Chinese shipping giant COSCO.
But a key difference between then and now is that the appetite to actually book ships at these near-record levels is high and supply is struggling to keep up with the demand, the shipping sources said.
The lack of available VLCCs has also seen an unusual increase in the number of Suezmax tankers sailing to China with as many as 10 such tankers booked in the past few days, the broker sources said.
“It makes sense when all VLCCs are booked. For charterers at the end of the day, the key is $/barrel so they would definitely look at smaller classes,” one U.S.-based shipping source said.
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Source: Reuters
