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Owners of VLCCs, the largest kind of tankers available, aren’t feeling all that happy lately. The announcement made last week by OPEC and a number of non-OPEC producers to extend production cuts to March 2018 has important implications for the crude tanker market, in particular VLCCs. In its latest weekly note, shipbroker Gibson said that “cutbacks largely originate out of the Middle East, where most
VLCC trade comes from. During the 1st five months of this year, VLCC spot earnings on the benchmark trade from the Middle East to Japan averaged $27,000/day, less than half the level of TCE returns witnessed over the same period last year. Although $27,000/day is still not bad by conservative estimates, extending cuts for another nine months will coincide with continued rapid growth in the tanker fleet. Between now and the end of March 2018, 34 VLCCs are scheduled for delivery, while 25 tankers have already been delivered since the beginning of the year. Although slippage in terms of delivery dates is likely to continue; nonetheless, we will still see a robust growth in the VLCC fleet size”, Gibson noted.
Furthermore, as the shipbroker says, “if OPEC succeeds in its intention to rebalance oil markets, this will translate into a further decline in VLCC floating storage, a big support factor to the market since early 2015. The total number of VLCCs involved in various non-trading activities (primarily storage) is already down. The latest count is at 23 units, down from 38 tankers at the end of last year, with the decline driven by Iranian and nonIranian crude storage. The extension of production cuts during the 3 rd and 4 th quarters of this year, the time when demand usually registers strong gains, suggests that there could be a further draw in a number of VLCCs involved in floating storage”.
According to Gibson, “on this basis, the downturn in the VLCC market is likely to accelerate in the short term. Yet, there may be a silver lining, which could offset at least partially the looming crisis for VLCC owners. Large scale cutbacks in the Middle East crude availability are stimulating long haul trade of Atlantic Basin crude to the East, in part being driven by the increase in value of regional barrels relative to the Atlantic Basin benchmarks. Analysis of AIS trade data shows that in terms of absolute volume of crude and fuel oil shipped on VLCCs, long haul trade from West Africa to the East increased by 13.5% between January and May 2017, compared to the corresponding period last year. The picture is similar for trade from Latin/South America: here the volumes shipped increased by 13%. An even bigger increase in VLCC shipments was observed from North West Europe/Mediterranean and the US Gulf. The volume of dirty shipments on VLCCs from North West Europe and Mediterranean to the East jumped by over 30% this year, while trade from the US witnessed a spectacular six fold increase. If Middle East crude exports remain restricted, while demand in Asia continues to rise, this will only stimulate further growth in long haul trade to the Pacific Basin”.
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