Asian VLCC Rates Spike For This Reason

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  • Atlantic drawing more VLCCs; PG supply shortens
  • US Gulf Coast crude exports spike, more ton-mile demand
  • Winter demand to perk up

A recent news article published in the Platts states that Asian VLCC rates close to 2-year high as tonnage supply tightens.

VLCC freight rates for hauling crude

VLCC freight rates for hauling crude from the Middle East to North Asia neared a two-year high Aug. 29 on the back of burgeoning oil demand and following altered trade flows which began with the Russia-Ukraine war.

Platts assessed the benchmark VLCC freight rate for Persian Gulf to China route, transporting 270,000 mt of crude, at w80, which is equivalent to $16.50/mt, on Aug. 29, data by S&P Global Commodity Insights showed. Platts assessed the Persian Gulf to Far East routes in the range of w80 since Aug. 18.

Platts last assessed the benchmark VLCC rates at a high of w85 on March 25, 2020, when the crude market was in a steep contango, prompting refiners and traders to scramble for ships to use as floating storage due to the drastic drop in demand caused by the COVID-induced global lockdowns.

VLCC tonnage shifts; more ships in the Atlantic

A combination of factors such as the Atlantic market drawing in more VLCCs, thereby tightening supply in the Persian Gulf region as well as higher refining run rates due to robust gasoil, gasoline, and jet cracking margins had helped boost the VLCC market.

Also, Europe’s efforts to replace Russian crude resulted in the rebalancing of tonnage supply globally, according to shipping market sources.

“Some VLCCs are just staying in the West and not coming back to the East,” a VLCC broker said.

OPEC’s recent increase in crude production raised the monthly cargo count from the Persian Gulf to 168 VLCC loadings in August, which is up 55% when compared with the monthly average in 2020.

All these factors have helped VLCC owners to easily push for higher rates when there is a flurry of cargoes coming out simultaneously from key crude exporting regions, shipping sources said.

The recent pick up in crude loadings from the US Gulf Coast has resulted in VLCC freight rates spiking across the various regions and also boosting ton-mile demand.

Crude exports for August from the USGC to UK continent, Mediterranean and Asia stood at 4.9 million mt compared with monthly averages of 3.6 million mt in the second-quarter and 2.5 million mt in Q1.

Winter crude demand picks up

There are high expectations of an uptick in the number of crude cargoes moving to Asia, especially to China, Japan, and South Korea, during the coming winter season, industry sources said.

With gas prices staying high, many traders said the fallback plan could be on crude to cater to residential heating requirements.

Already, many distillates crack spreads have rallied in anticipation of a spike in winter demand. Platts had assessed second-month gasoil crack against Dubai swaps at $55.62/b, the highest so far in August, S&P Global data showed. Jet fuel/kerosene cracks have also rebounded, hitting a one-month high of $49.91/b.

“I don’t see why this momentum [in the VLCC market] will not be maintained with winter demand. Only a drastic drop in China imports can swing the momentum negatively,” another VLCC broker said. “Otherwise, supply-demand fundamentals and new trade routes are supporting VLCC rates for H2 2022.”

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Source: Platts

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