The VLCC market faces low rates due to muted demand, high vessel availability, and preference for domestic vessels in China. Meanwhile, OPEC+ delays raise oil market volatility, yet potential contango could eventually boost tanker rates, reports Breakwave Advisors.
VLCC Market Sees Unseasonal Downturn
The VLCC (Very Large Crude Carrier) market is experiencing an unusual downturn for this time of year, marked by low activity and a persistent drop in rates across both Eastern and Western markets. Limited demand and high vessel availability continue to exert downward pressure on freight rates. In the East, as the month entered its second decade, a well-supplied tonnage list, combined with muted demand, kept rates under strain. While some market players are hopeful for a stabilization, the growing list of available tonnage and reports that Chinese charterers increasingly favor domestic vessels diminish the chances of a near-term rebound. This shift in preference by Chinese charterers reduces options for international owners, adding opacity to rate-setting as large oil traders wield greater influence. In West Africa, VLCC rates have followed a similarly negative trend. Here, sluggish demand and ample vessel availability have strengthened charterers’ position, allowing them to exert further pressure on rates. Operating expenses now provide a near-floor, preventing rates from dropping even further, though market concerns over price levels persist. With position lists at their highest level of the year, owners face one of the toughest rate environments in recent memory. In the cyclical nature of freight markets, however, such challenging periods seldom persist, often laying the groundwork for robust recoveries once freight rates eventually rebound.
Once Again, OPEC+ Delays
With ongoing geopolitical and demand uncertainties driving the oil market, volatility remains high, causing oil pricesto fluctuate in response to daily news events. Despite this, the oil market appears oversupplied as we look ahead to next year, with a “risk premium” preventing further price declines which in turn might prompt potential “market-driven” supply cuts. We believe OPEC+ will ultimately introduce additional barrels into the market, pushing prices into contango—a scenario that could benefit the tanker market, similar to the 2015-2017 cycle. Currently, tensions in the Middle East and a slow demand recovery from China are the primary influences on oil prices. However, we anticipate that clearer insights will emerge in the coming months, likely leading to a futures curve favorable to oil tankers as we approach next year. While the fundamental outlook for oil prices remains challenging, it is relative pricing that matters for tankers, not absolute price levels. Even with an unbalanced demand-supply picture, the potential for oil traders to “lock” in tonnage—if future prices exceed spot prices—should support higher freight rates, outperforming current expectations reflected in a rather flattish and unexciting freight futures curve.
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Source: Breakwave
