Tanker Shipping - Winter brings a spike for VLCCs

Tanker Shipping - Winter brings a spike for VLCCs


The freight market for VLCCs was surprisingly strong in November, building on top of a rally starting back in September from very sluggish levels. There is a significant influence from seasonality behind this as Asia, and the northern hemisphere in general, prepare for Winter.

The freight market for VLCCs was surprisingly strong in November, building on top of a rally starting back in September from very sluggish levels. There is a significant influence from seasonality behind this as Asia, and the northern hemisphere in general, prepare for Winter. This is expected to result in high volatility at elevated levels in the coming months. Fortunately, a lift in VLCC freight rates normally happens across the board, illustrated by the fact that even TD1 (Arabian Gulf to the US Gulf) was quoted above USD 40,000 per day at the end of November.

The recent development has turned the image of a lacklustre year in crude oil tanker business totally around, but unfortunately, only for the VLCCs. Earnings in the VLCC sector averaged at USD 9,897 per day in the first nine months. This compares to the average earnings so far in Q4 at USD 28,165 per day, which is a figure that provides fleet-wide profitability, with revenue covering OPEX and financing costs.

Earlier this year we saw multi-year low freight rates for Ras Tanura-LOOP/US Gulf and Ras Tanura-Rotterdam. At the end of November, freight rates on most eastbound routes out of the Arabian Gulf touched the peak levels of 2011 and 2012.

All year, product tanker freight rates have failed to improve on last year’s levels, with the only exceptions being export routes out of the US Gulf. Traditional backhaul routes are now the strongest in a weak market. The past two months have been particular disappointing for the larger product tanker segments trading on Arabian Gulf to the East. For the MRs and Handysize, the support from US heating oil demand has yet to materialize.

In particular, the LR2 benchmark route TC1 (AG-East) has taken some beating during November. Fixtures were done at WS 68, resulting in negative earnings if slow-steaming is not exercised on the backhaul leg. Also, the TC5 used as LR1 benchmark East of Suez could be found below USD 5,000 per day in November.

At a fleet growth of 2.9% so far this year – heading for 3.2% at year-end – the future has already arrived in the product tanker segment. It will be a future that contains higher fleet growth at 4% and 5% respectively in 2014 and 2015 (subject to change, if the appetite for scrapping grows). Following several years of slowdown in deliveries that matched the picture of slowing demand, the product tanker segment has enjoyed huge interest from investors during the year. With as many as 187 new contracts done in 2013, the orderbook has built up since the trough at the end of 2012. This has resulted in full orderbooks for product tankers at many yards, if we can take the orderbook information for granted, and furthermore believe that the current newbuilding capacity for product carriers is around 6-7 million DWT. This limitation has pushed 27 of the 2013-orders into 2016-delivery.

In contrast to that, we have only seen 26 new deals done for crude oil tanker tonnage. This is a clear sign of the present times that spoil the customers with quality tonnage at cut-throat prices. The crude oil tanker orderbook currently stands at its lowest point since 2000 and the appetite from investors is not expected to rebound in the next quarter.

Getting into the second half of the year, we have finally seen some VLCCs sold for demolition. In a quest to alleviate the oversupply of tonnage, owners have axed five units within the past five weeks, to bring year-to-date total up to 16. This number is a 10-year high and stresses the seriousness of the market situation, as some of the ships are no more than 15 years old.

Fleet growth in the crude oil tanker segment is on target to reach 2.3% by the end of the year, with around 15 VLCC/Suezmax vessels still to be delivered.

As a guide to the question of whether the upswing in the VLCC market is due to a fundamental improvement, it is pretty clearly not the case. Even though extensive slow steaming limits actual fleet growth, the nominal fleet keeps growing. So the extend of the current spike will depend on the demand side, but may equally be affected by owners and operators sailing more quickly on the backhaul leg.

Bear in mind that slow-steaming limits actual supply, but at current levels for VLCCs, it would be only natural for owners without ships in the Arabian Gulf to hurry back. This will eventually ease the tightness, provide longer tonnage lists and curb freight rates in the end.

BIMCO expects the slowdown in deliveries of crude oil tankers to extend into 2014 and probably beyond. In addition to that, interest from investors has been slim for three years. Only 99 crude oil tankers have been ordered since 1 January 2011. The crude oil tanker fleet (VLCC, Suezmax and Aframax) holds 1,757 vessels of 335 million DWT and an orderbook of 138 vessels and 30 million DWT.

IEA expects the global refinery crude throughput to have a strong run from November to January, breaking out of the 5-year range by 1 million barrels per day. As the rally is now on, the realisation of such a scenario will most likely keep solid freight rates around.

With the suspension of selected sanctions against Iran, the industry is looking forward to a little less troublesome job when trying to stay on the right side of these sanctions. The deal struck in Geneva on the Iranian nuclear programme allows Iranians to charter international tankers to transport crude oil to its customers. However, the deal will not bring about higher demand for shipping, as crude oil exports will remain limited and petrochemical exports are insignificant. There could perhaps be a positive impact on the oil price from a slightly larger oil supply and a clearly smaller level of political uncertainly and risk in the international society as such due to the deal.

For December/January, BIMCO expects that TC equivalent average rates for the VLCC segment come down somewhat from recent highs to settle in the region of USD 12,000-30,000 per day. Suezmax crude oil carriers are also seen down from recent peak to reach USD 10,000-20,000 per day. For the Aframax crude segment, expectations are more or less unchanged at USD 10,000-18,500 per day.

In the product segment, BIMCO expects earnings on benchmark routes for LR1s and LR2s from AG to Japan to improve and meet a level at USD 6,500-16,500 per day.

The winter season should support the present levels. Handysize rates thus forecasted to stay at USD 10,000-16,000 per day. MR average rates are expected stronger at USD 11,000-17,000 per day.


in Copenhagen, DK


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