The changing geopolitical picture is reducing demand for VLCCs and Poten & Partners offers two possible scenarios for the fleet
“Is the VLCC sector still the lead indicator for the tanker fleet?,” asks Poten & Partners head of tanker research and consulting Erik Broekhuizen in a mid-year research report. The conventional wisdom being that when the VLCC sector sees a surge in demand and/or earnings, there is a waterfall effect down through the smaller tanker sectors.
A number of factors have blurred this image. The pandemic led to a sudden drop in crude oil demand, and a subsequent demand for long-haul crude oil. The ongoing sanctions against long-distance exporters, Venezuela and Iran, have contributed to a fall in VLCC demand. On the supply side, the last few years have seen an increase in the so-called “rogue” fleet of VLCCs, over the acceptable chartering age of 15-years old, being sold on for further trading into a shadowy world of switched off AIS and STS activities to load sanctioned cargoes.
“The last few years have seen an increase in the so-called “rogue” fleet of VLCCs”
The unprovoked invasion of Ukraine by Russia has changed the outlook for a post-pandemic recovery and the continued lockdown in China is keeping demand from growing. The main beneficiaries of the change in trade are the Suezmax and Aframax sectors - Poten & Partners points to the seven-fold increase (Q4 2021 vs Mar-May 2022) in crude oil imports from Russia to India from ports that cannot accommodate VLCCs. In fact, it noted that VLCC calls to India actually fell.
The VLCC fleet did not benefit significantly from Europe pivoting away from Russian crude oil. Again, the Suezmax and Aframax tanker sectors have profited from increasing trade from West Africa and the Atlantic Basin.
China has been a major driving force in VLCC demand, but the continued lockdown has reduced VLCC calls to China. For a sustained recovery in VLCC demand, Poten & Partners sees a scenario of a rapid end to the war in Ukraine and the lifting of some of the sanctions. China lifts its lockdown and there is some normalisation of trade – maybe even a lifting of sanctions on Venezuela and Iran and the scrapping of the rogue fleet.
Under these conditions, the economies of scale that VLCCs provide would lead to a revival in demand, but there is a worst-case scenario, too. The war in Ukraine is not resolved any time soon and food supplies decline while prices rise. Energy shortages arise and prices increase, plunging the world into a global recession. The rogue fleet expands and becomes the main supply chain for Russian, Venezuelan and Iranian crude oil to meet the non-aligned buyers in the Far East. Under this scenario, Poten & Partners see a VLCC sector languishing under depressed demand and earnings.
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