WAF-East vs PG-East VLCC premium steepens amid bearish market conditions

The Worldscale differential for eastbound Very Large Crude Carrier voyages for loading in West Africa versus loading in the Persian Gulf has widened to above the usual market levels, with sources pointing to seasonal weakness in the VLCC market discouraging owners from committing to longer journeys.

Platts, part of S&P Global Commodity Insights, assessed freight on the 270,000 mt Persian Gulf-Far East route at w45.75 on July 11, while freight on the 260,000 mt WAF-Far East route was assessed at w53.5 -- a premium of w7.75.

The PG-East vs. WAF-East differential tends to fluctuate day to day based on tonnage availability and cargo demand, but it is usually within a range of w2-3.

The last time the PG-East vs. WAF-East differential was this wide was in August-September 2023, when the market was also going through a seasonally bearish period, with PG-East rates falling to the high w30s.

VLCC rates are currently at multi-month lows in all major loading zones, with sources citing reduced cargo inquiry levels, due to OPEC+ production cuts and lower summer heating demand, as well as disruption to the regular information exchange process between market participants, due to more staff members being on annual leave.

As a result, shipowners are growing increasingly reluctant to commit to the longer voyage between West Africa and the Far East, with the shorter voyage from the Persian Gulf currently more attractive, according to sources.

A typical VLCC voyage loading in Ras Tanura, Saudi Arabia, and discharging in Busan, South Korea, will take in the region of 20 days, while for the equivalent voyage loading in Cabinda, Angola, it will be closer to 31 days, according to S&P Global Commodities at Sea(opens in a new tab) data.

Reluctance to fix long

Shipbroking sources agreed that the widening of WAF-East vs. PG-East differential is being driven by voyage length and rate level considerations, although they had differing views on its likely duration and impact on the market.

"Owners are going for shorter voyages out of the AG [PG] as the market is very low -- you'll want more money to go to the west," a London-based VLCC broker said. "If you do it [load in WAF] now, you're taking your ship out of action for most of the third quarter."

The same broker added that he expected VLCC rates to remain depressed for the remainder of the summer, but that he was still confident that the market would pick up in the fourth quarter.

"Earnings are very low, and there is an expectation of a recovery, so owners are unwilling to fix long," a Europe-based VLCC broker said.

A second UK-based shipbroker argued that the premium for loading in WAF was largely nominal, as very few WAF-East fixtures are currently being fixed in the open spot market, with most cargoes going on charterers' own tonnage or getting fixed in private deals.

"There is a wider spread between WAF-East vs. PG-East, but there will be no impact anyway since WAF has no activity on the surface," the second UK-based shipbroker said. "No one is actively using the numbers and the spread will normalize pretty soon."

However, the first UK-based broker disagreed with this view, arguing that he believes the differential between the two routes will "stay high for a while."