Is VLCC Market Gaining Momentum At The Right Time?

A recent Riviera news source talks about Whether VLCCs are back in the game?

Higher freight rates

This week, benchmark VLCC earnings (based on vessels not fitted with scrubbers or other eco-design options) surged to over US$40,000/day after spending nearly 20 months with time charter equivalent rates either negative or below fixed operating costs.

So, what factors have led to these higher freight rates, and can they be sustained in the months ahead?

In trying to understand what has driven freight rates higher, trade data shows us that global VLCC export volumes have risen consistently since June 2022, while fixture volumes from the US Gulf and West Africa have trended higher over the past two months, as well. VLCCs have also seen their trading patterns shift and have been increasingly employed on voyages from the Americas and Africa to Europe as charterers seek to optimise their US$/tonne freight costs, particularly in the wake of bullish Aframax and Suezmax markets. Although these volumes are small, they have created new trading opportunities in the Atlantic basin.

Higher export activity showing up in the trade data can be partly explained by higher US production, with US crude exports reaching a record 5M barrels per day (b/d) last week as West Texas Intermediate’s (WTI’s) discount to international benchmarks incentivises exports of US crude. In fact, WTI has been the best-priced crude grade for months, so this alone cannot be the only factor behind the uptick.

VLCCs undertaking dark activity

Although benefiting to a lesser extent than small crude tankers, VLCCs have also seen increased demand to ship crude into Europe, with imports averaging around 900,000 b/d since April 2022. Global VLCC exports from the Middle East have also been growing and are now higher than they were during the same period in 2019. Given the growth seen in the VLCC fleet since the pandemic, it might be hard to justify the rate rises recently purely from a VLCC demand/supply perspective, however spot market availability is unlikely to have grown to the same extent, given much of the older tonnage has been sold into illicit trades, with Gibson counting over 100 VLCCs undertaking dark activity. Finally, positive sentiment spilling over from the Suezmax and Aframax markets is also likely to be playing an unquantifiable role.

Looking ahead, despite the widely reported economic risks and weaker Chinese/US economic data being reported of late, the fundamentals in the near-term would appear to be supportive of the current rates rally. Chinese crude demand has been observed recovering although the recovery remains fragile, while the government has taken a divergent interest rate policy to the West by cutting lending rates this week.

Further, US oil prices are expected to remain attractive to international buyers, particularly while SPR releases continue, and refinery intake eases off during the autumn maintenance season. Simultaneously, Europe will have to substitute even greater volumes of Russian crude as the year progresses, before ceasing all seaborne imports 5 December.

Stricter sanctions on European buyers

Stricter sanctions will not only impact European buyers, but also Asian buyers who rely on insurance underwritten in Europe, the UK and USA, which in turn may force larger buyers in countries like China to shun Russian barrels, shifting some demand back onto the VLCCs. Crude demand is also finding support from gas to oil switching, while the recent dip in crude prices and a narrower backwardation further incentivises longhaul crude exports.

Finally, wildcard factors can also not be ruled out. A potential return of Iran to the market or shift on OPEC production policy might be all that is needed to shift the VLCC market onto a more stable longer-term footing.