WEST OF SUEZ DIRTY TANKER QUARTERLY: Geopolitical, regulatory developments set to boost sentiment

The performance of the West of Suez crude tanker segment confounded market participants' expectations in the final quarter of 2024, with predictions that a seasonal end-of-year increase in demand would boost rates failing to materialize.

In the VLCC market, sentiment remained bearish throughout the quarter, with sources pointing to ongoing OPEC+ production cuts and weak Chinese crude demand amid underwhelming economic results and a build-up of tonnage across all the major loading zones.

Platts, part of S&P Global Commodity Insights, assessed freight on the 260,000 mt West Africa-Far East route at an average of w55 in the fourth quarter, with rates falling to a 14-month low of w45 on Dec. 17.

Industry sources have expressed diverging opinions about the market outlook for 2025, with some expecting earnings to remain depressed, while others forecast fundamentals to start moving back in favor of owners.

"No one sees much scope for [rates to increase] right now, as Chinese demand is significantly lower, so owners are sending their ships West, while lots of the Persian Gulf volume is being absorbed by Chinese tonnage," a London-based VLCC broker said. "Demand hasn't fallen completely off a cliff, but it hasn't been as high as we were expecting for Q4 and I can't see much change in Q1, as it's not historically been a great period [for owners]."

"I have a feeling lots is going to change in January, with Saudi Arabia planning to cut its crude prices to push up demand in China," a second London-based VLCC broker said. "I think tonnage is going to tighten quite a lot, and the AG market will have an effect on WAF, although [US Gulf] tonnage is still oversupplied."

With the VLCC fleet aging, many analysts have pointed to the lower rates fixed for compromised tonnage as another factor that has tended to dampen sentiment. However, the second VLCC broker argued that the prevalence of older vessels could begin to work in owners' favor in the new year, leaving a smaller pool of fully serviceable ships and therefore squeezing the tonnage supply.

Geopolitical developments could also significantly affect VLCC trade flows, following the US Treasury's announcement on Jan. 10 that it was sanctioning a further 180 ships involved in the dark fleet. Sources have said this could lead to China replacing Russian, Venezuelan and Iranian barrels with additional conventional shipments from the Persian Gulf, West Africa and the US Gulf, which would lend support to rates in the mainstream VLCC market.

Any significant deterioration in US-Chinese relations during the upcoming Trump presidency could also affect VLCC trade flows, as a possible economic conflict between the two nations would likely cause disruption to the US Gulf-China VLCC route, according to a Middle East-based shipbroker.

"[The market] will be political, and much depends on how Trump reacts -- if he puts higher import taxes on Chinese goods, then China could react in kind, which would create tensions which trickle down to the shipping market," the broker said.

Suezmaxes begin recovery after historical lows

The West of Suez Suezmax market experienced a volatile final quarter of the year, but owners ultimately proved unable to mount a sustained recovery from the lows seen during the third quarter.

Freight on the 135,000 mt WAF-UK/Continent route on Oct. 4 peaked at a three-month high of w102.25, exclusive of EU Emissions Trading Scheme costs, yet ended the year on a 16-month low of w67, exclusive of EU ETS costs.

"This is the lowest I have seen things since I started," a London-based Suezmax broker said. "Volume has been pretty [bad] all over, and we've seen many ships opening in East ballast straight back West, as there is such little volume out of the Persian Gulf, which certainly doesn't help."

However, following a post-holiday lull in activity that saw the WAF-UKC rate slump to w59, the lowest level since February 2022, increased cargo demand has helped to lift sentiment, with market participants forecasting a recovery in rates.

"The market definitely seems firmer currently, with last week's rates feeling like the bottom, so we're only really looking up from those levels," a second London-based Suezmax broker said. "Last week was very close to [break-even point] for most owners, hence the pushback, as most owners would rather hold tight and leave their ship prompt than fix at a loss."

Meanwhile, in the Mediterranean and Black Sea, stricter environmental regulation in 2025 will push up costs for shipowners undertaking short-haul voyages, with EU ETS charges rising from covering 40% of CO2 emissions to 70% at the start of January and the Mediterranean set to become an Emissions Control Area zone in May. Owners are likely to try to pass on these extra costs to charterers by asking for higher rates, which could in turn lend support to the Suezmax market more globally, according to the Middle East-based shipbroker.