WEST OF SUEZ DIRTY TANKER QUARTERLY: Q4 set to herald firmer sentiment amid economic, political uncertainty

The third quarter of 2024 was a frustrating period for shipowners operating in the West of Suez VLCC sector, with muted spot-market inquiry levels and weakness in the Persian Gulf loading zone preventing rates from mounting a sustained recovery from the lows experienced in the second quarter.

Rates for the 260,000 metric tons West Africa-Far East route hovered around the Worldscale 55 level throughout the third quarter, with charterers wary of fixing above w60.

However, with the advent of the fourth quarter and as laycans begin to stretch into November, most sources have said they expect the market to firm, although opinion remains split as to the scale and sustainability of any potential increase in rates.

“I think rates will increase by winter, but I don’t think things will skyrocket -- we’re not seeing enough demand in China,” a Europe-based VLCC broker said. “The market will probably be flat with small increases -- we’ll see a spike and then things come off, but I don't see any drastic changes happening.”

By contrast, a Europe-based shipowner had a more bullish outlook on the market.

“Winter is coming and people want to stock oil, so I can’t see rates going back to where they were in the middle of summer,” the shipowner said. “I don’t buy the argument that China’s [GDP growth] is slow -- they are still increasing it, so they will need more oil. I don’t see why you would be pessimistic, as a 4% increase is still significant.”

Fluctuating differentials

A key feature of the VLCC market since the summer downturn in rates has been the volatility of the typical differentials seen for key routes.

With earnings falling during the summer, shipowners displayed a preference for shorter voyages in order to keep their vessels in a position to take advantage of an expected uptick in rates during the fourth quarter. As a result, the premium for WAF-East over PG-East steepened, while the premium for WAF-UKC over WAF-East narrowed -- and at times even inverted.

However, with rates firming across the crude tanker complex at the start of October, these tendencies are now beginning to reverse.

“I think now we are potentially seeing the original premium we used to see -- it’s a good sign and the market direction is going the right way,” a London-based VLCC broker said. “It seems things are back to normal now with earnings on the rise and Aframaxes and Suezmaxes taking off.”

Firming Suezmaxes

The West of Suez Suezmax market experienced a similar depression in rates during the third quarter, with the rate for the key 130,000 mt WAF-UKC route dropping to a near yearly low of w69.5, exclusive of EU ETS charges, on Sept. 26.

However, the first week of October has brought respite to owners, with rates jumping by 42% from w72, exclusive of EU ETS charges, on Oct. 1 to w102.25, exclusive of EU ETS charges, on Oct. 7.

“The market is booming right now: the Med, USG and WAF are going high,” a Middle East-based shipbroker said. “We were expecting this as it’s the end of summer, and it’s normal to see [greater] activity in this period.”

“There are lots of cargoes in the US Gulf, which is the driving force in the west, and WAF is fixing decently forward -- 3 weeks [in some cases] -- which we haven’t see for a while and is a good sign, as it would take at least a week for the market to crash [back down],” a Europe-based shipbroker said.

In addition to a firming US Gulf market, a Middle East-based shipbroker attributed the recent firmness in the Suezmax market to a seasonal increase in inclement weather, which causes disruptions to the tonnage supply, and an escalation of tension in the Middle East.

“The paper curve’s going up as well, but it’s hard to say if it’s going to last,” the broker said.

Uncertain outlook

Market participants remain uncertain about the repercussions of the recent political instability in the Middle East for the crude tanker market.

Some sources said they thought shipowners might hold back from fixing their vessels until the situation stabilized, further constricting the tonnage pool.

However, a London-based VLCC broker argued that much of the uncertainty had already been priced into the market, and that only a limited number of players would be affected by potential further escalation of the conflict.

“I don’t think there will be much difference in terms of rates -- Greek owners won’t be affected and Chinese players fixing out of the Persian Gulf won’t be targeted as Iran won’t want to upset China,” the broker said. “Only western refiners will be affected, and they tend to stay in the west anyway.”