DIRTY TANKERS QUARTERLY: Bullish crude tanker freight environment to remain geopolitically driven

The dirty tanker freight market is poised to remain elevated heading into the fourth quarter of 2022 amid Russian-related trade flow shifts accompanied by looming sanctions and surging global export markets.

In addition to geopolitically driven freight volatility, the dirty tanker market also enters a historically stronger last quarter of the year. The outlook for freight across all key dirty tanker load regions looks firmer, but tight fiscal stimulus adopted by several major economies on the back of surging inflation has created potential demand destruction concerns.

Trade flows have been altered following the Russia-Ukraine war, with VLCCs increasingly taken on USGC crude export runs to Europe. Simultaneously, the easing of pandemic-related lockdowns in China has led to increases in freight to Asia from the US Gulf Coast, specifically on VLCC ships. Subsequent to Europe's efforts to replace Russian crude with USGC barrels, rebalancing of tonnage supply on a global level has been necessary, bolstering ton-mile demand and creating an overall favorable crude export environment.

An escalation in the number of ships booked for long-haul runs to Asia in comparison to trans-Atlantic runs in September reveals ton-mile demand making a comeback as Asian crude demand returns to the forefront. Crude oil exports from the US Gulf Coast heading to Asia reached 41% in July, surging from a low of 33% in April, according to US Census Bureau data, and is expected to be at higher levels in August and September onward.

According to Platts fixture data, 13 VLCC ships were booked for USGC to Asia runs in July 2022, while the number of ships booked in August of 2022 leaped 46% to land at 24. In July and August 2021, the number of VLCCs making the same run only hit six and one, respectively. As inquiry spiked and the regional position list tightened, Platts assessed freight for the USGC to China run at $10.5 million Sept. 16, a high not seen since April 2020. Freight for the route was last assessed Oct. 5 at lump sum $9.88 million, with expectations of further firming in the week to come.

The market continues to weigh potential impacts from the planned G7 price cap on Russian oil, which will be put into place Dec. 5. The price cap is expected to further take additional Russian crude barrels off the market and add to the need for tanker demand out of the USGC and Persian Gulf, but the exact impacts are still uncertain.

"I think the added difficulty is going to push up ton-miles, and with aging fleets that are not all workable, it will push up rates," a shipbroker said.

Global VLCC markets work in tandem

Strong adjacent markets and long-haul demand out of the USGC during August and September were the key drivers behind an improved West African freight market, with rates recording substantial gains.

On Sept. 21, the West Africa-to-East 260,000 mt route was assessed at $32.91/mt, an increase of 68% compared with July 29, when the market was assessed at $19.58/mt. This was the highest value recorded since April 29, according to S&P Global Commodity Insights data.

Sanctions prompt ice class secondhand sales

On the back of the European sanctions coming into force in early December, owners of ice class Aframax ships are increasingly engaged in the secondhand sale and purchase market. Demand for those ships has spiked lately, enabling owners to achieve favorable returns by selling their assets. Buyers are said to be Middle Eastern entities, likely acting on behalf of Russian owners.

According to market sources, a 2007-build ice class Aframax was sold around the mid- to high $10 million mark in July 2021, whereas currently, a 2008-build ice class Aframax with the same specifications was sold for $33 million, setting the premium above the $10 million mark.

Libyan exports provide Aframax support

Also, on the other side of the Atlantic, smaller-tonnaged Aframaxes have been seeing impacts from geopolitical events. Kazakhstan's CPC blend crude oil exports in October recorded the biggest drop since September 2016, averaging 791,301 b/d with only Suezmax stems to be loaded. This resulted in reduced shipping demand for Aframax vessels in the Med with rates, however, remaining strong.

Platts assessed the Ceyhan-to-Mediterranean 80,000 mt route at $17.26/mt Sept. 29, compared with $12.08/mt Sept. 13, recording a 43% increase. Interestingly, this was due to increased delays in a number of Mediterranean ports, tightening vessel supply in the region and an uptick in Libyan exports.

According to Kpler shipping data, total exports in September amounted to 22.71 million barrels compared with the three-month average of 16.36 million barrels. Strong inquiry out of the region has helped owners sustain their earnings, with owners' daily returns for a Ceyhan-to-Med run assessed at $58,441 o Sept. 30 basis 0.5% bunker fuel oil.