Dirty tankers quarterly: Markets adjust to shifting trade patterns

Weak VLCC market fundamentals have framed an obscure outlook for the smaller tanker sizes.

A resurgence of COVID-19 cases in China led to a series of lockdowns across the country and reduced crude import appetite from domestic refiners. This in turn translated to weakening long-haul demand for VLCCs out of West Africa, putting pressure on freight rates out of the region during the second quarter. After a spike recorded in early April, rates softened on the back of slim inquiry levels and weak adjacent markets.

Freight for the West Africa-to-East 260,000 mt route was assessed by S&P Global Commodity Insights' Platts at $21.39/mt on April 8, falling to $13.82/mt by May 12.

However, it is uncertain whether a recovery in Chinese oil demand would lead to renewed appetite for West African crude, with West African grades being displaced by heavily discounted Urals grade from Russia. According to S&P Global Commodities at Sea, Chinese Urals imports from Russia hit a historic high of 316,000 mt in May, surging 159% month on month, leaving West African crudes overwhelmingly pointed at Europe. VLCC tonne mile demand is thus under threat on the back of weakening Chinese and Indian demand for West African and the North Sea grades.

West African crude exports to Europe on the rise

EU sanctions on Russian seaborne exports and a prohibition on European entities to provide insurance on the transportation of Russian oil to third countries by the end of the year are likely to have a dampening effect on VLCC shipping demand. Weak inquiries from out of the North Sea are putting pressure on tonnage supply in other loading hubs, with an increasing number of owners being hesitant ballasting north.

"Owners are no longer willing to head to the North Sea, as demand out of the region is muted," a shipbroker said.

European appetite for West African and US crude has been on the rise to replace part of the sanctioned Russian barrels. According to S&P Global Commodities at Sea, European imports from West African countries averaged 720,104 b/d in January, rising to 1.07 million b/d in March and 1.2 million b/d in May. On the back of increased short hauls, however, tonnage lists in the Continent and the Mediterranean are being replenished at a much higher pace, keeping a lid on rates.

Increased competition

Weak fundamentals for the VLCC markets have translated into increased competition in the smaller sizes, with VLCCs cannibalizing Aframax and Suezmax stems out of the US Gulf and West Africa respectively, keeping rates at bay across all sizes.

On the back of favorable freight economics, charterers have been increasingly looking at co-load opportunities out of the two regions, capping any potential for Suezmax and Aframax markets to improve. According to market participants, the short-haul trade from the US Gulf Coast and West Africa to Europe is here to stay for the foreseeable future.

"Everything is against the VLCCs at the moment," one owner said. "We don't expect any major improvement before 2024."

Toward the end of Q2, West African Suezmax rates recorded a 24% increase, with freight for the West Africa-to-UKC 130,000 mt route assessed by Platts at $17.64/mt on June 22 compared with $14.26/mt on June 13. However, competitive VLCC freight rates capped any further improvement, with the market softening amid weakened inquiries in the region.

"Unless the VLCC markets improve, we will hardly see any substantial movement on the smaller sizes," a second shipbroker said.

Higher voyage costs

Owners are faced with increasingly high voyage costs, with bunker prices at very high levels, putting extreme pressure on their earnings. According to S&P Global, 0.5% marine fuel delivered Rotterdam in Q2 averaged $861/mt compared with $740/mt in Q1, representing a 16% increase. On the back of such high bunker prices, freight rates for most routes have stabilized above Q1's average, as net earnings for owners have been in negative territory in some cases.

Weak Mediterranean demand

Libyan oil supply outages have intensified during the second quarter, with the county's crude production remaining well below its current capacity of 1.2 million b/d. According to the latest Platts OPEC+ survey from S&P Global, the North African country saw its output slump to a 16-month low of 770,000 b/d in May.

As a result, the Mediterranean Aframax and Suezmax markets have been suffering from weak inquiry levels in the region, with tonnage lists being oversupplied. A continuous flow of cargoes and tight tonnage availability in early June led to a short-lived spike in Aframax freight markets, with the Ceyhan-to-Mediterranean 80,000 mt route recording a 68% increase between June 8 and June 18, when was assessed at $18.12/mt.

However, with most of Libya's oil production offline, any improvement in the Mediterranean freight markets can hardly be sustained with rates correcting downwards.