Global tankers' freight likely to rebound on winter demand in Q4

Global tankers' freight may rebound after winter demand sets in, coming out of the current weak phase amid slower refinery runs while diverging trends in clean and dirty tankers are no longer sustaining, analysts and market participants across Asia and Europe said on Aug. 11

Several factors are pulling the market in opposing directions. The drop in freight may reflect seasonal factors, still an uptick is expected in the fourth quarter, Tim Smith, the London-based director of shipping consultancy, Maritime Strategies International, said in a recent report.

He said the lingering Suez Canal crisis and only a trickle of new deliveries are supportive fundamentals while slowdown in oil demand growth in China is keeping the downside potential intact.

Ole Rikard Hammer, an Oslo-based senior oil and tankers analyst with Arctic Securities, said the tanker freight market is currently at crossroads and diverging trends in clean and dirty tankers, mainly VLCC, did not last.

Historically, tanker rates are highly correlated between segments but not so in Q2 when Medium Range, or MRs and Long Range, or LRs did "very well while the supertankers could only limp along".

A large part of this divergence is already disappearing with the latest decline in clean tankers' freight to their lowest levels so far for this year on the key Persian Gulf-North Asia routes, while the slower growth in crude trade is impacting the VLCC freight.

Freight on the LR1 benchmark Persian Gulf-Japan route as of Aug. 8 has fallen w86 since the start of July and more than halved in the last 10 weeks, S&P Global Commodity Insights data showed

Crude oil trade in the first half of 2024 was 1% higher on the year and this comes after the trade grew almost 5% in 2023 and 9% in 2022, said Enrico Paglia, a Genoa-based research manager with shipping brokerage and consultancy Banchero Costa, or Bancosta.

Lower earnings

MSI has forecast the daily average spot VLCC earnings at $33,700 in Q3, basis voyages to China from the US and the Persian Gulf, compared with $40,600 in Q2.

The VLCCs are suffering from China's weak crude demand with both refinery runs and imports declining in Q2, said Arctic's Hammer.

OPEC+ countries such as Russia and Saudi Arabia have responded to lower demand to shore up prices and therefore the VLCC activity has been slow, he said.

The number of spot cargoes for VLCCs in the Persian Gulf and the Red Sea, including Contracts of Affreightment are estimated around 140 in July, down from 160 in March, according to brokers' estimates.

Historically, oil demand is higher in Q3 by around 1.0 million-1.5 million b/d compared with Q2 but if there is any further slowdown in the Chinese economy, demand for crude shipments may get even slower.

MSI projected that the Q3 Long Range 2 tanker earnings at $39,000/d on the Persian Gulf-Japan route are likely to be significantly lower by a fourth compared with $52,500/d in Q2.

In H1 2024, trade in refined products was 2% lower on the year, Paglia said. According to the estimates of brokers, at least 60 dirty tankers, of all sizes combined, have turned clean so far this year, adding to supply and dragging down freight.

The clean market has still benefited more than crude from the Red Sea trade disruptions as the East-to-West product trade is proportionately more impacted, said Hammer.

However, West Africa's imports have declined after Dangote refinery ramped up output, added Paglia.

Slow fleet growth; oil shipments to rise

The crude tanker fleet has grown only marginally so far this year with only a VLCC and Suezmax each being delivered, and the small growth recorded coming from five uncoated Aframaxes, said Bancosta's Paglia.

Another dozen dirty tankers are expected to hit the water in 2024 but after factoring in the demolitions, the fleet size will remain largely unchanged, he said.

Even next year, the fleet size will mostly remain unchanged even though the EIA has forecast global output to rise by 2.2 million b/d, he added.

Paglia also pointed towards OPEC+ plans to begin bringing back some barrels in October and phase out the voluntary 2 million b/d of cuts over the following 12 months. There will then be more volumes to be shipped on tankers, brokers said.

US exports have been strong and VLCC chartering activity can bounce back, said Hammer. US is steadily producing more than 13 million b/d, added Paglia. OPEC+ needs to regain some of the market share lost to the cuts in favor of other exporters, in particular the US, he said.

Rates have also got support because both crude and refined products are traveling longer distances due to unrest in the Red Sea, sanctions against Russia, and the drought affecting the Panama Canal.

A large section of the fleet has been purchased and specializes in only moving Russian crude and refined products, thereby tightening supply for other origins.

The bidding for over 15-year-old tankers has led to a monumental transfer of wealth from Russian interests to mostly Greek shipowners, said Edward Finley-Richardson, a Bordeaux-based shipping analyst with Contango Research.

The irony is that the oldest and therefore most undesirable tankers have been bid up the most, causing horrendous market distortions, he said.