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USGC VLCC freight jumps 26% on week as delays trump impact of pandemic

Highlights

USGC-China VLCC freight rises $1.4 mil on the week

Currently 32 VLCCs sitting outside northern Chinese ports: cFlow

USGC crude cargo stream steady despite closing arbitrage

Houston — US Gulf Coast VLCC freight jumped more than 26% over the past week as a combination of discharge delays at Chinese ports and an influx of charterer inquiries across all key global VLCC loading regions trumped the otherwise depressed freight environment due to the coronavirus pandemic.

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Freight for the VLCC 270,000 mt USGC-China route was assessed July 9 at lump sum $6.75 million, jumping $650,000 on the day, and an increase of $1.4 million since July 2 when freight for the route reached the lowest level seen since July 26, 2019.

An increase in Chinese crude imports led to significant delays at ports in the region. This gave shipowners the upper hand in negotiations as tonnage availability is not being replenished in a timely manner, with the majority of USGC-loading ships ballasting from Asia discharges.

The most notable delays have been at the northern Chinese ports of Qingdao and Lanshan, where ships are seeing wait times of 10-12 days in anchorage and two to seven days within the port, according to shipping analysts in the most recent weekly Alphatanker report. This is up significantly from the average total time of two days.

There are currently 23 VLCCs that have been waiting outside all Chinese ports for over seven days, the Alphatanker report said.

There are currently 32 laden or partially laden VLCCs sitting in or outside the two northern Chinese ports, according to cFlow, Platts trade flow software.

Until the start of July, the cost of taking a VLCC across all major loading regions had been on a downward spiral since mid-June amid tanker demand destruction fueled by crude production cuts instituted by OPEC+ alliance members, including a record 9.7 million b/d reduction from May through to July.

Market participants are currently awaiting the upcoming OPEC+ meeting on July 15 to see if those production cut levels will be extended into August.

Inquiries push past arbitrage level

US export volumes have been not looking promising for a firm freight environment, with the US Energy Information Administration reporting the lowest level of USGC-origin exports since November 2019 for the week that ended July 3 at 2.39 million b/d.

The arbitrage opportunity has been waning for WTI crude exports heading to Asia, which fuels the majority of all VLCC movements out of the USGC.

When USGC-China VLCC freight was at the $6.1 million level, the incentive for Asian crude buyers to take US-origin WTI MEH crude rather than Russian ESPO to northeast Asia was closed, with WTI MEH at a 24 cent/b premium, according to S&P Global Platts Analytics crude Arbflow data.

Higher freight levels could contribute further to the unfavorable arbitrage environment.

"So we get to the point where the [arbitrage] is not looking great and if you really don't have to move then you won't," a charterer said July 7 when talk emerged of fixtures above the $6 million level.

In the week beginning July 6, however, a total of six unique USGC-loading VLCC cargoes was reported, with at least four heard on subjects by the end of the Platts Market on Close assessment process July 9, including deals done by Trafigura, Unipec, Shell, and Occidental.

Shell was said to have done the last deal, having placed the Olympic Luck on subjects at lump sum $6.7 million for a USGC-East voyage loading August 5-7.