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Crude exporters opt for VLCCs over traditional Aframax for USGC-UKC route

Houston — High rates in the Americas for Aframax vessels, which typically carry crude cargoes from the US Gulf Coast to Europe, have charterers looking toward larger ship classes -- VLCCs and Suezmaxes -- to move cargoes across the Atlantic as the cost of taking a VLCC is currently 52.2%-63.9% of the cost of an Aframax.

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There have been at least six Suezmaxes and three VLCCs placed on subjects to carry crude from the US to Europe since the market returned from the long holiday weekend January 2, compared with only four for Aframax vessels, according to S&P Global Platts fixture logs.

European refiners typically prefer the 500,000 barrels carried on Aframax vessels, with Suezmaxes becoming increasingly more popular -- dependent on rate economics. There were 146 Aframaxes and 52 Suezmaxes booked for the USGC-UK Continent or Mediterranean route in 2018.

VLCCs rarely make the move to Europe, with most such large vessels, typically loading 2 million barrels of crude in the Americas heading for discharge in Asia. No VLCC had carried a cargo to Europe until the Olympic Lady set sail from Corpus Christi Lightering heading to Rotterdam with an Occidental Petroleum cargo December 24.

Since then, Oxy, ExxonMobil, Vitol and Shell have all been seen working VLCC-sized USGC-based cargoes for discharge in Europe. On Thursday, ExxonMobil placed the VL Prime on subjects to make the 270,000 mt USGC-UK Continent/Mediterranean run at lump sum $2.7 million for a January 16 laycan.

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Also Thursday, Vitol placed the Cosnew Lake on subjects to lift a VLCC-sized cargo from the USGC to the UKC at $3.4 million for a January 26-20 laycan.

Tuesday morning reports showed that Shell placed the Landbridge Majesty on subjects to lift a 270,000 mt cargo from East Coast Mexico to Rotterdam at a lump sum $3.9 million, which sources said would place USGC-loading VLCCs making the trans-Atlantic run at $3.4 million-3.5 million.

Looking at the most current fixtures, the cost of carrying crude on this route currently sits at a range of $10/mt-$12.59/mt on 270,000 mt cargo basis. Including the current cost of reverse lightering, which is necessary for VLCCs loading in the USGC, the cost would include an additional $5.37/mt for three full-service Aframax lighterings of 700,000 barrels each or $6.22/mt for four full-service Aframax lighterings of 500,000 barrels each.

The cost of taking a VLCC sits at a range of $15.37/mt-$18.81/mt, while the freight for an Aframax on the USGC-UKC route was last assessed Tuesday at $29.42/mt, making freight for a VLCC 52.2%-63.9% of that of an Aframax vessel. This cost does not include the difference in discharge port costs.

"As with all trades, if it makes sense, it will happen," one shipowner said of the shift in tonnage preference.

Freight for Aframax vessels have climbed over the past month on tight tonnage availability as charterers worked to cover cargoes ahead of and following the holidays, rising $8.52/mt to $29.42/mt or Worldscale 160.75, where it was last assessed Tuesday.

The arbitrage to export US crude to Europe has been closed for WTI crude traveling on Aframaxes for the month of January, according to S&P Global Platts Analytics data. But the spread between Brent and WTI crudes has been widening, sitting at an average of $8.81/b over the past month, providing an incentive for charterers to move US crude to Europe and Asia.

--Catherine Wood, catherine.wood@spglobal.com

--Edited by Valarie Jackson, valarie.jackson@spglobal.com