- A sudden plunge in oil demand on account of COVID-19 proved to be a blessing in disguise for the oversupplied crude tanker market in 2Q20.
- As a result, many vessels locked-in floating storage have started to return to trade, hurting freight rates.
- An increase in the short-term period chartering of VLCCs has raised market speculation about another surge in floating storage of crude oil.
- However, the timing of the return of these vessels to crude oil trade will thus decide the fate of freight rates and the crude tanker market.
While an increase in onshore storage of cheap oil by refineries boosted tonnage demand, a rise in floating storage of crude oil squeezed tonnage supply in the crude tanker market, reports Hellenic Shipping News.
A decline in TC rate
With the gradual recovery in oil demand, many vessels locked-in floating storage have started to return to trade, hurting freight rates.
Although freight rates, both in the period as well as spot markets, have come down significantly from the highs in April, they are still not truly reflective of the weak demand-supply fundamentals.
The 1-year TC rate for VLCCs has declined from an average of $60,000pd in April to $35,000pd in August.
Nonetheless, about 7% of the crude tanker fleet, including 64 VLCCs, was still locked in floating storage at the end of August with the majority of these vessels storing oil offshore China.
Charter deals
With a sharp decline in freight rates, several charterers, including Trafigura, Shell, BP, Mercuria, and Unipec, have reportedly taken VLCCs for short-term time charter ranging from three to nine months.
As charter rates have declined, any possible deepening in the crude price contango would provide a profitable floating storage opportunity to charterers.
Moreover, as many short-term time-charter deals done in March-April for floating storage at high rates are now expiring, recent charter deals would possibly be a mere replacement charter.
Nonetheless, considering the weak prospects for oil demand, we do not expect any significant deepening in the contango and a rise in floating storage.
When will the floating storage bubble bust?
Floating storage has artificially squeezed tonnage supply in the crude tanker market, supporting freight rates.
However, floating storage is a ticking time bomb for the crude tanker market since sooner or later, these vessels will return to trade crude, and the resultant influx of tonnage in the market will eventually hurt freight rates.
The timing of the return of these vessels to crude oil trade will thus decide the fate of the crude tanker market.
Oil demand prospects
As the prospects for oil demand over the next couple of years are not bright, the chance of any significant surge in oil prices is limited.
In such a scenario, the upcoming winter season will provide the best exit opportunity for traders to offload oil stored on vessels, as demand will climb higher during this period.
The influx of tonnage from floating storage in such a case will thus negate any significant recovery in freight rates this winter, and thus VLCC earnings in 4Q20 would remain significantly lower than what FFAs suggest.
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Source: Hellenic Shipping News
