The VLCC freight market has experienced a significant downturn after a recent surge driven by new Russian shipping sanctions. While these sanctions initially boosted demand for non-sanctioned tankers, the emergence of a “shadow fleet” of vessels operating outside of these restrictions is creating uncertainty and potentially limiting the duration of this market strength, reports Breakwave Advisors.
Significant Shift
The past week witnessed a significant shift in the politically sensitive oil market. Focus on potential oil price declines, driven by statements from the former President, exerted downward pressure on prices.
Reconciling lower oil prices with increased U.S. drilling activity and significant Saudi investments in the United States presents a complex challenge. Despite these factors, headlines surrounding potential price declines were sufficient to push prices lower, albeit from elevated levels.
An increase in OPEC+ production is unlikely without a robust recovery in Chinese demand, which has yet to materialize. While U.S. oil production remains at record highs, low inventory levels continue to support prices. However, the current supply-demand dynamics appear to be balanced at prevailing price levels.
Political rhetoric will undoubtedly continue to influence oil prices. However, the reality is that Chinese demand growth may be primarily focused on gas-related products rather than crude oil itself.
For the tanker market, lower prices, if sustained, could stimulate demand, making the absolute price level and the shape of the futures curve crucial factors in determining market strength. A scenario with low prices and a contango curve appears plausible over the next year or so.
Way Ahead
The tanker market is showing signs of recovery after a prolonged period of low rates. Reduced new vessel supply, sustained oil demand, and shifting trade patterns are contributing to this recovery. This combination of factors is expected to increase spot rate volatility. Geopolitical turmoil is also likely to support freight rates in the medium to long term.
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Source: Breakwave Advisors
