Crude Oil, Maritime & Shipping

January 30, 2025

INTERVIEW: Low freight earnings weigh on crude tanker orders: Frontline

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HIGHLIGHTS

Fleet age stands at multi-decade high

Oil demand growth will require compliant ships

Crude tankers have little to lose or gain from Red Sea return

Meager earnings for crude tankers, rather than uncertainty about decarbonization options, are weighing on fleet renewal, but potential increases in long-haul demand present some green shoots, the CEO of crude tanker major Frontline told S&P Global Commodity Insights.

The last few years have been a boom period for the so-called "shadow fleet" that carries sanctioned Iranian and Venezuelan barrels as well as Russian barrels that breach the G7 $60/b price cap. This has taken custom away from the compliant fleet and trimmed long-haul voyages available to its ships, Lars Barstad said in an interview.

"Right now, if you're a compliant shipowner, you have absolutely no incentive to go and order or buy a ship," he said.

In order to defend investing in a VLCC, a $125 million-$130 million asset that would be delivered in 2027 or 2028, and to have any meaningful return on equity, an owner needs $50,000-$55,000/d time charter equivalent for 20 years, Barstad said. Frontline's VLCC TCE in the third quarter was $39,600/d, down 6% year over year. The Suezmax TCE in Q3 slipped 13% year over year to $39,900/d.

"This has not been achievable and there has been no reason to have confidence in that happening [with] the way the parallel oil market has been able to develop over the last couple of years," Barstad said.

Platts, part of Commodity Insights, assessed its global VLCC index for non-scrubber fitted non-eco ships at $24,169/d TCE Jan. 28.

Deliveries of newbuild crude tankers plunged 74% year over year in 2024 to a 36-year low amid challenging market conditions and decarbonization challenges, shipping industry body BIMCO said Jan. 22. The range of alternative fuel options before shipowners, combined with their regulatory and commercial uncertainty, makes it difficult to choose right now when placing an order for a new ship, analysts said.

Ships under the age of 20 have fallen in number since October 2021 and with that transportation capacity, "but with no real effect on transportation prices," Barstad said.

Nevertheless, freight rates are at the upper end of long-term averages. Platts assessed the rate to carry a 270,000 mt cargo of crude from the Persian Gulf to China at $11.04/mt Jan. 28. The five-year average is $12.02/mt and the 10-year average $11.34/mt.

Of the global VLCC fleet of 885 ships, 15% are 20 years old or older, according to data from Commodity Insights.

Shifting trade routes

Asian customers are a key point of interest at present, especially China and India. Although the G7's "price cap" on Russian crude has been in place since December 2022, only recently have India and China responded in a meaningful fashion to sanctions against Russia. Just before the latest batch of punitive US measures, on Jan. 7, China's Shandong Port Group blacklisted ships sanctioned by the US Treasury. Its terminals are often used by Chinese independent refineries that rely on Iranian, Russian and Venezuelan crude.

Indian officials have given signals that they too may reduce arrivals of Russian barrels.

"This has made the Chinese refiners actually resume, to a much greater degree, taking West African barrels, Brazilian barrels and so forth. And this obviously benefits the compliant fleet," Barstad said.

The effect will be gradual given the wind-down period, he added.

Russia sent 2.5 million b/d of crude to China and India in January, down from 2.8 million b/d in December and an average of 2.9 million b/d through 2024, according to data from S&P Global Commodities at Sea(opens in a new tab).

Global oil demand will grow by 2 million b/d in Q1 after rising 1.4 million b/d in Q4, analysts at Commodity Insights said Jan. 28. In 2025, Asia is projected to account for 58% of the net global oil demand growth.

With Russia, Iran and Venezuela largely at capacity, incremental demand growth will need to be met by compliant oil on compliant ships, Barstad said.

"After years in a kind of a very strange market, if you are a compliant ship operator, we're going to hopefully come back to more normalized dynamics in the market... New demand and new production, that's not likely to come from any sanctioned countries," he said.

The compliant fleet is suddenly going to see at least parts of the missing demand growth come back, Barstad said. "But it's more a VLCC story because these are long-haul barrels," he added.

Little impact from Red Sea

The progress of the ceasefire between Israel and Hamas and the halt to Yemen's Houthi attacks in the Red Sea is drawing attention across the shipping industry, and the implications of a return to Red Sea navigation have been widely discussed.

While the effect on product tankers would be marked because of a jump in utilization after clean tankers started going around the longer Cape of Good Hope, the effect on crude carriers would be negligible, Barstad said.

"At the same time as traffic through the strait has fallen, you've also lost a lot of barrels trading from, particularly Middle East, to Europe and the Med," Barstad said." So you're talking about, in theory, close to 500,000 b/d that will resume flowing if you assume the pre-Suez closure trading patterns come back."

Red Sea diversions did not raise freight rates as much as expected so a return to the area will probably not lower them much, he said.


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