The VLCC market is currently experiencing an exceptional upswing, with spot freight rates frequently surpassing six-figure daily earnings. This momentum has been fuelled by rising crude supply from OPEC+ nations and heightened stocking activities by charterers eager to secure firm oil volumes. However, beneath the surface of these strong returns lies a growing concern: a rapid increase in new VLCC orders that could jeopardize the market’s long-term balance.
Excessive ordering to hurt long-term prospects of VLCCs
In November alone, owners placed 27 new VLCC orders—a significant spike that pushed the overall orderbook to more than 15% of the existing fleet. While total orders for the year remain slightly lower compared to the previous year, the surge toward year-end has sparked unease among analysts. Much of this ordering is speculative, buoyed by current high earnings rather than grounded in underlying long-term fundamentals. If this trend continues, the market risks entering a phase of oversupply just as demand may begin to taper.
A major part of the concern stems from the mismatch between ordering and scrapping. Many VLCCs in the global fleet are over 20 years old and theoretically due for replacement. Yet scrapping activity has been minimal, largely because older vessels remain commercially viable in certain trades and some continue to operate in opaque, non-mainstream markets. Without proportionate retirements, the inflow of new tonnage could sharply increase fleet capacity, eroding vessel utilization rates and pushing earnings downward once the freight market normalizes.
This structural risk is further complicated by long-term uncertainties in oil demand. The current demand is strong, but future fundamentals are far from guaranteed. Energy transition policies, shifting refinery flows, and changing crude import patterns in Asia could all soften tonne-mile demand. If this coincides with a wave of new deliveries, the sector may find itself with more ships than the market can support. Investors and owners enjoying today’s high returns may therefore be walking into a potential downturn if they assume current conditions will persist.
Recent surges in VLCC asset prices also add to the vulnerability. Second-hand and resale values have risen sharply, reflecting the tight market and strong earnings. But these valuations are unlikely to be sustainable if oversupply takes hold. Historical patterns show that vessel prices fall quickly once freight rates begin to soften, leaving late-cycle buyers exposed to rapid depreciation.
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Source: Drewry
