A recent news article by Yahoo Finance speaks about Supertanker rate roller coaster: Surprise spike to $91,000 per day.
The supertanker business
The supertanker business has a reputation for being one of the most volatile freight markets in the world. It’s living up to its reputation again.
“Supertankers stole the show,” said Clarksons Securities analyst Frode Mørkedal on Friday’s shipping rate action. Average spot rates for older very large crude carriers (VLCCs; tankers that carry 2 million barrels of oil) rose to $83,300 per day. Newer and more fuel-efficient VLCCs earned $91,000 per day, according to Clarksons.
VLCCs specialize in long-haul trades, primarily cargoes to Asia loaded in the Middle East or from Atlantic Basin sources such as the U.S.
The VLCC market is not only important to watch for tanker owners and their investors. Energy exports are a key driver of the U.S. economy — and VLCCs are a central component in the international supply chain of American oil producers.
U.S. production will increasingly be sold to Asia, the International Energy Agency (IEA) said in its new medium-term forecast released Wednesday. This rise in long-haul crude flows carried by VLCCs from the Atlantic to the Pacific basin will coincide with a near total collapse in shipyard deliveries of VLCCs.
From highs to extreme lows to highs again
VLCC rates are subject to dramatic swings up and down. They were down at around $25,000 per day in spring 2019, then surged to over $150,000 in fall 2019 after a series of attacks in the Middle East and U.S. sanctions on Chinese tanker owner Cosco.
Rates sank back to $25,000 when COVID first struck in 2020, then skyrocketed to near $250,000 per day in spring 2020 after Saudi Arabia and Russia simultaneously opened their crude spigots, causing floating storage to surge.
VLCCs experienced their worst stretch in decades from mid-2020 to mid-2022, with rates languishing under $10,000 per day and shipowners bleeding cash. Long-haul crude transport demand collapsed due to high storage inventories and COVID-stricken consumption.
Then, starting in the second half of last year, the VLCC market became more balanced, leading to higher highs and higher lows.
Rates jumped to $100,000 per day last November, fell back to $40,000 in February, seesawed back to $100,000 in March, then back to $40,000 in May, and now they’re headed toward $100,000 again. Next month, Saudi Arabia will unilaterally cut production by 1 million barrels per day, a negative for VLCC demand, implying the rate roller coaster will take another turn.
“VLCCs have made surprising moves higher,” said Jefferies analyst Omar Nokta of the recent rebound. “VLCCs have enjoyed a strong run.”
Mørkedal explained, “The Middle East saw a surge in bookings for late June loadings, which was bolstered by a slew of long-haul fixtures from the Atlantic Basin. This surge has tightened the market ahead of Saudi Arabia’s expected drop in July production.”
Key transport role — and miniscule orderbook
High spot rates come and go for VLCCs. The bigger focus of market bulls is not the surprise June jump, but the medium-term outlook for vessel supply and transport demand.
There are currently 901 VLCCs on the water, with just 10 on order, according to Clarksons. Eight will be delivered in the remainder of this year, none next year and one each in 2025 and 2026. The ratio of the orderbook to the on-the-water fleet is down to a miniscule 1.1%.
It is impossible to significantly increase VLCC fleet supply until 2026-2027 at the earliest as a result of construction lead times and the fact that Asian yards are already full of orders for container ships and gas carriers.
On the transport demand side, DHT (NYSE: DHT) highlighted the importance of VLCCs to the global crude trade during its latest conference call, citing data from Kpler.
This data shows that VLCCs carry around half of global seaborne volumes measured in barrels per day. A more accurate measure of demand is ton-miles — volume multiplied by distance. Using ton-miles to account for the distances between buyers and sellers, the data shows that VLCCs handle around two-thirds of seaborne crude flows.
IEA predicts long-haul crude trade will increase
Demand for long-haul crude transport aboard VLCCs is expected to rise at the very time the orderbook will cap supply growth.
The new forecast from the IEA predicts global oil demand will decline through 2028. However, from the tanker trade perspective, it predicts there will be a substantial increase in volumes shipped from the Atlantic Basin to the Pacific Basin.
The EIA said that the Atlantic Basin crude balance will swing from roughly flat in 2022 to a surplus of around 4.5 million barrels per day (b/d) in 2028. There will be too much supply in the Atlantic Basin due to increased production from the U.S., Brazil and Guyana coinciding with falling demand from refineries in the U.S. and Europe.
Meanwhile, 70% of the new refining capacity is being built east of the Suez Canal. “China is expected to be the single largest contributor with India and the Middle East tied in second place,” said the IEA, which predicts Asia’s crude import demand will rise by 4.8 million b/d between 2022 and 2028.
Middle East crude production will increase but much of that region’s incremental crude will be used by its own refineries, thus unavailable to load aboard VLCCs for delivery to Asia. That leaves the U.S. and other long-haul Atlantic Basin suppliers as the main source for incremental Asian demand.
“Continued demand growth in Asia will far outpace increased crude supplies from the Middle East over the forecast period [through 2028],” said the IEA. “With Middle Eastern crude and condensate exports constrained by the start-up of new refinery capacity, the Atlantic Basin crude surplus will play a critical role in meeting Asian demand.”
All of which is a recipe for higher future VLCC rates. According to Mørkedal, “The increasing distances involved in transportation … suggest a potential substantial increase in ton-miles. At the same time, the current tanker newbuild orderbook has reached a 40-year low. The combined effect suggests that tanker markets may reach new heights in the coming years.”
Did you subscribe to our newsletter?
It’s free! Click here to subscribe!
Source: Yahoo Finance