In the LOOP: Record US crude exports boost VLCC tanker demand, rates

Historically high US crude exports have given a boost to spot rates for very large crude carriers making long-haul voyages east from the US Gulf Coast, a trend that is expected to continue into March and April, according to shipping sources.

The cost of carrying crude on a VLCC loading on the USGC has been on a steady climb upwards since February 12, when rates for the VLCC 270,000 USGC-China route were at their lowest level since September 2018. Freight was last assessed at lump-sum $7 million March 1, up $1.6 million, or 29.6%, from the 2019 low of $5.4 million. Freight rates for the route were heard at the same level March 4.

Exports of US crude reached a record for the week of February 15 at 3.607 million b/d, with the most recent week of February 22 maintaining those levels at 3.359 million b/d, US EIA data shows.

The jump in US export volumes and high demand for VLCCs is apparent in vessel traffic flow. There have been 48 VLCCs booked for loading out of the USGC so far in 2019 – about five times the amount booked in the first two months of 2018 and a drastic difference to the two VLCCs that were booked during the same period in 2017.

Brent-WTI spread attracts buyers

Shipping sources expect that this uptick in crude exports will continue, with both March and April crude cargo itineraries looking as busy as February loadings. US crudes have been appealing to foreign buyers in recent weeks as the spread between Brent and WTI widened to over $10/b in mid-February. The 30-day rolling average spread between Brent and WTI swaps was about $8.62/b and the spread spent nine consecutive trading days wider than $9/b in February.

While the Brent/WTI spread has narrowed in the past week – a trend that could be bearish for US exports – demand for US crudes could receive a fresh boost if trade talks between the US and China find a resolution.

As WTI-based crudes have been priced at such steep discounts to other similar grades on the global market, they have been in strong demand. And in turn, it has created a high demand for tankers to haul US crudes to international destinations.

"It's a general trend, exports are now consistently above 2.5 million b/d and all things held equal I think each month will be bigger than the last month," one shipowner said. "There are local factors that will affect it from time to time but that is the trend."

Shipping rates stay high

Freight for the VLCC 270,000 mt USGC-China route reached a 2019 yearly high of lump-sum $7.4 million on January 16, reaching its peak after rates were steady to higher for seven consecutive days as a flurry of fixtures were reported for second half of February crude cargoes, when export volumes soared.

Rates for USGC-loading VLCCs moving east have not fallen below lump sum $5.4 million since September 26 2018, when charterers were fixing for third decade October VLCC cargoes. Rates have seen steady support as US crude exports have remained above 1.9 million b/d since mid-October, according to US EIA data.

Although freight for the USGC-origin long-haul routes has seen intermittent weakness in rates, market levels have held above those prior to Q4 2018 and are expected to remain strong, according to shipping sources.

Freight rates for the USGC-China VLCC route have averaged lump sum $6.63 million so far in 2019, $2.08 million, or 45.7%, higher than the average annual rate prior to the strength seen in mid-September 2018.

Additionally, charterers have started looking towards VLCCs to take large crude cargoes across the Atlantic to Europe, a route typically seen made on smaller Suezmaxes and Aframaxes, on a combination of more favorable economics and a need to take larger volumes to European refiners.