The Very Large Crude Carrier (VLCC) market continues to be highly susceptible to a confluence of external shocks, creating a volatile environment for owners and charterers alike.
Short-term Momentum and Regional Divergence
The VLCC market is showing an uptick, supported by increased third-decade July loadings, a tighter position list of available vessels, and typical seasonal chartering activity. These elements are collectively provide short-term momentum to freight rates.
Geographically, the East of Suez market is spearheading the recovery, indicating stronger demand and activity in regions like the Middle East and Asia. Conversely, the West of Suez market remains under pressure, despite some recent short-term improvements.
Looking ahead, a robust start to August, particularly if coupled with increased crude oil purchasing activity from China, could exert additional upward pressure on rates for routes such as the Arabian Gulf (AG) to China and AG to Singapore.
Geopolitical Tensions and Red Sea Impact
In the longer term, escalating geopolitical tensions and ongoing security threats, particularly in the Red Sea, are significantly impacting VLCC operations and costs. While most VLCCs typically avoid direct transits through the Red Sea due to their size and the nature of their voyages, the ripple effects are considerable. Owners are compelled to incorporate higher war risk premiums into their rates and account for longer ballast voyages, especially on West Africa routes, as vessels take detours to avoid the volatile region.
These diversions and increased perceived risks contribute to elevated insurance costs across adjacent regions, effectively creating a “psychological rate floor.” This discourages owners from repositioning their vessels eastward, as the higher operational costs and risks might outweigh potential gains, thus impacting vessel availability and freight rates.
Crude Oil Price Volatility and Demand Outlook
Crude oil price volatility remains a significant wildcard for the VLCC market. This volatility is influenced by OPEC+ supply discipline and persistent uncertainty surrounding Chinese demand. Over the past two weeks, Brent crude has fluctuated between $67 and $71 per barrel. For the VLCC market, this price instability indirectly affects cargo volumes by making predictions regarding the timing, quantity, and direction of upcoming shipments more complex, as traders and producers often delay decisions amidst shifting refinery margins and unclear arbitrage opportunities.
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Source: Breakwave Advisors
