Freight rates for Very Large Crude Carriers in the East of Suez have ebbed to this year’s low. But the situation is not as bad as it could have been, as associate editor Wanda Wang explains in this video. More ton mile demand is anticipated as Asian refiners look farther afield to quench their thirst for crude oil. Is this enough to keep the freight market afloat?
Asian VLCC market down, but not out
By Wanda Wang, Associate Editor, Shipping
Welcome to the Snapshot – our series which examines the forces shaping and driving global commodities markets today.
Freight for Very Large Crude Carriers in the East of Suez has ebbed to the this year’s low. And, yet, this is apparently not as bad as it could have been, all thanks to a shift in oil flows.
The key Persian Gulf to Japan freight has fallen 50% from the start of 2017. Currently this rate is in the low Worldscale 50s, where time charter equivalent earnings range at $18,000 per day, compared with approximately $53,000/day at the beginning of the year.
The VLCC market is dominated by the Persian Gulf and has been soft for the last month because of the following three key factors: long tonnage, oil production cuts, and refinery turnaround season.
First, the tonnage situation – the VLCC fleet grew from 684 ships at the end of 2016 to 700 vessels at present. The addition of new vessels has increased competition in the market, which remarkably saw discounts given by vessels lacking approvals widen to almost 15 worldscale points at one point. Another 29 or so newbuildings are due for the year, and while the pace of entry has slowed, there have been no scrappings yet and only three are projected for this year.
Second, the OPEC production cut. The oil producers’ cartel pledged in November to cut 1.2 million b/d from October levels over January to June. While this has created an oversupply of VLCC tonnage in the Persian Gulf region, there is hope this will have a positive twist for vessel owners after turnaround season, which is the third bearish factor, typically over March and April.
In the first half of this year, 2.9 million barrels per day is expected to be shut for maintenance, out of a total refining capacity of around 32 million b/d in Asia.
So what’s going to help the market?
More ton mile demand is anticipated as Asian refiners will have to look farther afield to fuel their appetite for crude. US crude export levels have hit record levels in January and February. In February, China imported 65,000 b/d, and Japan a record 62,000 b/d.
The firmer Dubai market encouraged Asian refineries to look for alternative barrels -- Russian Urals, North Sea Forties and Angola’s sweet but heavy crude grades.
Just taking a sign from the independent refiners in China, from January to February, they’ve seen a drastic increase in imports from West Africa and South America.
The bulk of West African crude exports loading in February and March are headed to Asia. The trend has been most pronounced in Angola, with Platts data showing three-quarters of the March-loading program scheduled for Asian destinations, up from the 62% in March 2016.
With healthy cracking margins in Asia, the region is likely to operate at maximum run rates in the near future.
Until next time on the Snapshot -- we’ll be keeping an eye on the markets.