WEST OF SUEZ DIRTY TANKER QUARTERLY: Prospects for Q4 recovery in the balance amid mixed signals

VLCC owners look to shake off late summer bearishness

West of Suez VLCC market participants expect rates to hold steady -- or even firm -- into the fourth quarter, after a particularly volatile period that saw rates drop to near 16-month lows in mid-September before mounting a recovery.

Market sources cited various reasons beyond seasonality for this weakness, including a lengthy tonnage list, low inquiry levels, extended OPEC+ oil production cuts, uncertainty over China's economic prospects and weakness in adjacent markets.

However, many of the above factors have now largely or partially reversed, with the advent of the fourth-quarter loading window, firming Persian Gulf-Far East and US Gulf-China markets, and an increasingly tight tonnage list.

Owners are now confident that they can extract higher rates from charterers from what will likely be their final fronthaul voyage of the year; a Europe-based VLCC owner said he was currently holding back from fixing his vessels in order to take advantage of higher rates further down the line.

Commenting on oil demand more generally, a second Europe-based VLCC owner said: "Looking at the fundamentals, there is need for oil way above production at the moment, which is admitted even by the Saudis -- everyone is almost out of reserves at the moment and winter is around the corner."

Some shipbrokers echoed this positive sentiment.

"The tonnage list is tight from the first to second decade [of October], and even tighter from the second to third decade," a UK-based VLCC broker said. "We've had a long quiet period, but vessels were getting taken off the list without anyone noticing, so [in the end] the market wasn't actually as quiet as people thought it was."

However, a second UK-based VLCC broker cautioned against excessive optimism.

"When we had that recent jump in rates, the momentum built up and people got carried away to an extent -- owners have been way higher in their ideas."

Suezmax prospects unclear amid reduced crude flows

The outlook for the Suezmax sector is mixed, after rates in the third quarter fell close to their lowest levels since the outbreak of the Russia-Ukraine war.

According to a UK-based Suezmax broker, the primary reason for this downturn has been the Saudi oil production cuts, which have significantly lowered volumes of crude oil being exported from the Persian Gulf to the Far East. This in turn has put downward pressure on the West of Suez market.

Some market sources said they believed rates would rise in the fourth quarter, although others were more bearish, pointing to weak fundamentals.

"The Suezmax market is coming off in the West, but I don't think this will last; things elsewhere are fairly bullish, and Aframaxes and VLCCs are going up," a Europe-based Suezmax broker said.

Similarly, a second UK-based Suezmax broker said he was confident the market would see some upside towards the end of October due to seasonal factors, although a third UK-based Suezmax broker was less optimistic.

"The market looks moribund without Russian cargoes, and the [OPEC+ oil production] cuts have been extended till the end of year... I don't see how the market picks up from here," the UK-based broker said.

However, he added that owners were still earning in the region of $15,000/d for the Suezmax WAF-UKC route, which although down significantly on the $50,000/d levels from earlier in 2023, still represents "good money."

Aframaxes hampered by ex-Russian tonnage influx, lackluster European economies

In the West of Suez Aframax sector, the market is faced with plenty of uncertainty heading in the fourth quarter after rates generally weakened through the third quarter, traditionally the slowest quarter.

The Russian-Ukraine war shows no sign of ending soon. It has had a profound effect on cargo movements from the Baltic and Black Sea zones and the emergence of the so-called "gray fleet" -- an overlap of ships that have fixed Russian business but are looking to re-enter the non-Russian marketplace. While the Russian Urals oil price remained below the G7 sanctions cap of $60/b, mainstream owners were able to carry Russian oil exports from the Baltic and Black Sea.

Various factors have combined so that mainstream owners have now largely returned to the open market: the Urals price has been above $60/b since mid-July; reduced demand due to Russia's OPEC+ oil production cuts throughout summer which have been extended through to the end of the fourth quarter; and a narrower earnings premium for trading these routes. This additional tonnage has entered the market at a time of weaker demand. Economic growth in Europe is expected to remain sluggish in the fourth quarter as governments attempt to squeeze inflation out of the system with high interest rates.

With OPEC+ production cuts driving oil prices towards $100/b the battle against inflation looks set to dampen demand throughout the fourth quarter. These negative headwinds are expected to weigh upon the freight market in the fourth quarter, although they will be countered by seasonality with winter heating demand in Europe and weather delays liable to create more volatility and push rates higher. However, the scale of recovery is now somewhat smaller than that envisaged at the start of the third quarter.