London — Decade-high freight rates have been a boon for tanker owners but it is starting to squeeze trading houses, charterers and refiners, with analysts and market sources questioning how long the trend will persist.
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The spike in bunker fuel prices has been boosted by the nearing of the International Maritime Organization's 0.5% sulfur cap, along with attacks on Saudi Arabian oil installations and US sanctions on subsidiaries of China's Cosco Shipping. These factors have pushed freight rates to record highs, tightening tonnage in all vessel sizes and regions.
The US clampdown on Cosco's tanker companies for violations of sanctions against Iran have reduced global VLCC supply by 5%, according to industry estimates.
"I don't know what to say [it feels like it is] Merry Christmas already," said a shipowner active in the West of Suez tanker markets, when asked about the steep rise in freight rates.
Freight rates for a VLCC on a Persian Gulf to China -- a pivotal tanker route -- have been trading at over 11-year highs.
S&P Global Platts assessed the cost of chartering a VLCC, which can carry up to 270,000 mt or 2 million barrels of crude, on a Persian Gulf to China route at $27.29/mt on Wednesday. This is the highest daily freight rate on this route since July 31, 2008.
"It is getting crazy out there," said another shipowner. "Rates are just flying up. It is difficult to say when it will stop. Owners are being bullish."
The meteoric rise has put some brakes on spot crude trading, making arbitrages for long journeys less attractive.
A surge in the cost of chartering a tanker in the Black Sea has hit trade of Kazakhstan's CPC Blend crude, which loads from Novorossiisk, with some sellers frustrated and hoping that they might be able to pass on higher costs to buyers.
Tighter availability of tankers has also restricted flow of light North Sea crude into Asia that is linked to Brent prices.
Some West African crudes have also come under pressure as freight rates have soared.
"[Differentials to Dated Brent] are under serious pressure with freight making new highs. The landed numbers are too expensive for all corners of the world," a crude trader said.
HOW HIGH WILL THEY GO?
"The question is when will the omelette get burnt?" said one shipping source, implying that momentum in the market could slow down but for now shipowners are in the driving seat.
Some sources, however, said the increase has more to do with geopolitics than market fundamentals.
"How high will they go?" said Peter Sand, chief shipping analyst of BIMCO, a key international shipping association. "Far Eastern refiners are desperate to secure crude to support the higher crude runs they have prepared for all year. This is the main driver ... uncertainty has set the market on fire."
"It's not fundamentally supported. Fleet has grown by 6% over the past year and demand is nowhere near that -- despite the fact that Q4 is peak season and IMO 2020 is fast approaching," Sand added.
While there is a glut of VLCCs in the market, increased demand as refiners run at record rates in the fourth quarter to meet new marine fuel specifications could offset excess tonnage.
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European Shipping Seminar | November 27, 2019 | Athens, Greece
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