Viewpoint : A bleak outlook for VLCC freight rates
Published date: 29 December 2020
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Very large crude carrier (VLCC) rates in the Mideast Gulf are likely to remain under pressure into 2021, as Opec+ policies will offer little initial support.
The Opec+ group decided on 3 December to raise its collective crude production by 500,000 b/d in January. The increase — which equates to around two 2mn bl cargoes a week — will be shared across all vessel classes, and will not support VLCC rates in 2021 on its own.
Subsequent output adjustments by the Opec+ group will be decided at monthly ministerial meetings, and production cuts are also possible.
VLCC shipments of crude from the Mideast Gulf to Asia-Pacific — by far the busiest route for the vessel class — declined by 21pc on the year to just over 250mn t in the second half of 2020, according to Vortexa. The volume lost equates to 250 VLCCs, more than one supertanker a day.
The overhang of tankers available to load before the standard fixing window averaged 25 during the fourth quarter. This oversupply, which has pushed VLCC rates between the Mideast Gulf and east Asia down to $6.77/t so far on average in the fourth quarter, is likely to stay. Despite a slight increase in recent weeks, rates were almost 25pc lower than any previous fourth quarter since Argus started assessing the route in 2005.
Hopes for global oil demand recovery remain tied to the easing of measures taken to curb the spread of the Covid-19 pandemic. Argus Consulting estimates global crude demand will rise by 5mn b/d on the year in 2021, which would still leave it nearly 4mn b/d below 2019 levels.
But demand in China, as well as in India and other emerging markets, has recovered more quickly than expected. And some positive signs are emerging for VLCC and Suezmax tonne-mile demand from China, the world's largest oil importer. Shipping research firm Alphatanker estimated that US-China crude shipments will increase by 75pc on the year in 2021 to around 1mn b/d. China's purchases of US crudes have ramped up as Beijing looks to meet its interim trade deal negotiated with Washington in January, which included commitments to buy more US energy products. But the incoming administration of president-elect Joe Biden has not given a clear signal on what it plans to do about the deal, which is due to expire in late 2021.
On the tanker supply side, although the VLCC order book was at multi-year lows in relation to fleet size for most of 2020, 32 new tankers are scheduled to be delivered in 2021, according to shipbroker SSY. This means that the fleet will increase in size unless scrapping increases significantly.
After limited scrapping in 2019 and 2020, more could take place in 2021, with 232 ships — or 29pc of the fleet — more than 15 years old, which is the typical cut-off point beyond which ships are chartered at a discount. These older ships are also likely to operate at higher cost than newer vessels, making them more likely to be scrapped, particularly in an environment of lower rates. But the number of vessels scrapped would need to rise tenfold from the three so far in 2020 in order to offset new deliveries, so this is unlikely to impact rates in the short term.
In the longer term, if the order book remains low tanker supply could tighten. Lower earnings and uncertainty over future environmental legislation are likely to discourage some companies from making major investment. But there are already signs of an increase in ordering activity, and any future tightening of supply will depend on whether all the options on a recent spate of orders for VLCCs to be delivered in 2022 and 2023 are exercised, and whether this increase in demand continues.
By Nikos Kokolinakis