The 300% increase in VLCC spot rates has not been seen since 2007, but will be dampened by a surge in VLCC speeds
VLCC spot rates shot up by 367% week-on-week on the Middle East Gulf to US Gulf route, according to Clarkson Research Services. On the Middle East Gulf to China route, the time charter equivalent surpassed US$330,000/day. The high tide in VLCC rates also lifted other tanker sectors, including Suezmax (up 133% to US$160,000/day week-on-week) and Aframaxes saw a weekly average of US$59,000/day.
Shortly before the spike, Clarkson Research Services had noted the encouraging signs in the tanker market fundamentals: the projected tanker fleet supply growth of 2% was comfortably below the 5% expected growth in demand, driven in part by IMO 2020.
That said, the current tanker market is entirely driven by geopolitical influences. The conditions were set when President Trump lifted the waivers on US sanctions on Iran, and the increase in detrimental activity in the region. The tipping point was the actions of the US Department of Treasury’s Office of Foreign Assets Control (OFAC), which, under the direction of the Secretary of State, can add specially designated nationals (SDNs)* to the list of companies and people whose assets are blocked, and US citizens are generally prohibited from dealing with them.
The reaction is nothing short of fear of mixing with a felon: everyone in the chain of crude oil logistics – trader, shipbroker, bank, shipowner, ship operator, bunker provider, terminal operator, refiner – now needs to be aware of exactly who is the counter-party and furthermore, the counter-parties’ counter-parties. It is a boom for the vetting industry, and from a brokers’ point of view, the safe option is to refuse any tanker that may have been involved in Iranian or Venezuelan infractions of US sanctions.
As a result, there is a scramble for untainted tonnage to secure carriage for committed loadings. In the short term, VLCC rates have spiked as noted above. Soon spot rates will abate.
VLCC ballast average speed is a useful indicator of market strength. In the last six months there has been a significant negative difference between the average speed in ballast of VLCCs which have been slow-steaming to save fuel, and the higher average speed when laden (VesselsValue data). Recently, as geopolitical conditions declined and the fundamentals firmed, the average ballast speed began to pick up from around July 2019 onwards.
By mid-August, the average speed of VLCCs in ballast had accelerated noticeably and at the start of September 2019 overtook the laden speed, which itself was accelerating. The latest data shows the average ballast speed is significantly higher that the laden speed as 12.5 knots in ballast versus 12.2 knots for laden voyages.
The increase in speeds will effectively increase VLCC supply, dampening the spike in rates. Another dampening effect will be the natural inclination for owners to order VLCCs waiting for ballast water treatment systems and scrubber retrofit slots in China, to sail straight back to the Middle East Gulf to squeeze in one more super-profit voyage while the conditions last.
* As a trade weapon, OFAC has legal armour-piercing abilities. US individuals and companies are investigated, fines imposed and/or penalties agreed. Those found guilty may also find they are unable to bid for US Government contracts and find other companies are unable to trade with them for fear of being tainted by association.
The US OFAC has declared the following Chinese individuals and companies connected as SDNs for their alleged dealings with Iran:
The Chinese companies listed are:
Cosco Shipping Tanker is listed by VesselsValue as operating four VLCCs, three Suezmax tankers, three Aframax tankers, six Panamax tankers and a Handy tanker.
Pegasus 88 Limited is listed as the owner of 1998-built VLCC Tian Ma Zuo, which is operated by Kunlun Shipping. The later operates four VLCCs, one handy tanker and two VLGCs. According to Clarksons, these companies control around 3% of the tanker fleet, and have a much higher influence on the carriage of crude oil into China.
The issues surrounding the VLCC market and IMO 2020 marine fuel sulphur cap transition will be discussed at the Asian Sulphur Cap 2020 conference in Singapore on 15-16 October 2019
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