VLCC spot rates have seen a significant and sustained rally since early September, defying historical seasonal trends. The primary driver of this rally is strong VLCC fixing activity, particularly for voyages from the Middle East Gulf to China, which is being underpinned by Chinese crude stockpiling.
VLCC Market Rally
The VLCC market has experienced a dramatic improvement, with VLCC spot rates for the Middle East Gulf–China benchmark route rising by 84% month-over-month and 40% quarter-over-quarter. On a year-over-year basis, rates are up approximately 75%, a gain compared to September 2022. This rally has been fueled by a surge in fixing activity driven by a high number of uncovered voyages for September in the Middle East Gulf. This activity has tightened the tonnage list and created a strong bullish sentiment.
The Role of Chinese Crude Stockpiling
The VLCC rate rally is strongly supported by high crude imports from China, which are largely being redirected into storage rather than being consumed by refiners. In August, China’s imports averaged 11.65 million barrels per day (mbpd), and early September onshore inventories were estimated at 1.4 billion barrels. This indicates that China is absorbing volumes well above its actual refining demand, driven by strategic and geopolitical reasons.
Underlying Market Weakness
While this stockpiling provides a strong underpinning for VLCC demand, it also masks a fundamental weakness in the underlying oil market. The report notes that growth in China’s near-term oil demand, particularly for transportation fuels, is limited due to structural factors such as:
- Strong electric vehicle (EV) penetration in consumer and industrial sectors.
- An extensive railroad network.
- Efficiency gains in air travel.
The sustained VLCC demand is dependent on continued Chinese stockpiling, which remains highly price-sensitive. While the stockpiling surge should help sustain elevated freight levels into the typically strong fourth quarter, the market remains exposed to risks, including a potential slowdown in Chinese intake or renewed OPEC supply restraint.
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Source: Breakwave Advisors
