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Chinese holiday sends dirty VLCC freight to 4.5-month high

Highlights

Rotterdam to Singapore VLCC freight rates have hit a four-and-a-half-month high as traders attempted to shift product to Asia before factories shut down for China's National Day.

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Known as Golden Week, the holiday will last from October 1-8.

Lumpsum rates soared to $3.3 million for a VLCC, basis 270,000 mt, at the end of last week, the highest since May 16.

The holiday will mean muted demand from Asia this week, and market players have tried to jump ahead and organize fixtures to the East before it started, pushing freight rates higher.



"Ships were being fixed to go from East to West, causing a shortage [in tonnage]," a trader said.

A shipbroker described the Persian Gulf VLCC market as very firm and rising nearly w10 in a week, "which has really boosted sentiment in the West as well."

However, with weaker Persian Gulf demand, more vessels could ballast to West Africa, limiting prices that shipowners in the North sea can push for, sources said.

The oil market structure has also had an effect on freight and shipping logistics.

Backwardation in ICE Brent and low sulfur gasoil futures is encouraging traders to sell both crude and product out of storage, creating more demand for vessels of various carrying class.

Furthermore, the current premium of ICE Brent over NYMEX WTI has created opportunities for US product to be marketed in Brent- or even Dubai-related crude pricing regions, naturally a West to East arbitrage.

The pause in Chinese buying has also affected both Suezmax and Aframax rates.

Shipowners of these vessels reported strong activity on the West-Africa to Asia run, which has also had a knock-on effect on rates between Northwest Europe to Asia.

Given the extra two days to ballast in the North, shipowners are seeking premiums for Northwest Europe-based loadings East in order to compound the WAF strength in rates.

Looking specifically at the fuel oil market, high freight is hurting arbitrage margins between Rotterdam and Singapore, making the worthiness of the 40-day trip debatable among traders.

There have been differing views on the workability of the fuel oil arbitrage from Northwest Europe to Asia as a result of the freight gains.

"If you own oil it's open; if you need to buy oil then it's not," a second trader said.

Assuming an average 3.5% 380 CST fuel oil price of $315/mt, and a premium in Singapore $23 above that, freight alone would eat into 52% of the gain.

--Anthony Guida, anthony.guida@spglobal.com

--Peter Farrell, peter.farrell@spglobal.com

--Eleni Pittalis, eleni.pittalis@spglobal.com

--Edited by Jonathan Fox, jonathan.fox@spglobal.com