Tanker rates soar as Chinese tankers become untouchable

This has reduced the supply of available tonnage as demand for crude oil rises ahead of the northern hemisphere winter and the imposition of IMO 2020. The result is a sharp increase in spot rates.

Shipping’s opaqueness when it comes to asset ownership and the identity of beneficial owners requires charterers to use vetting agencies and discovery specialists as part of normal business practice. As Shipping Strategy’s managing director writes in a recent blog “Shipping’s traditional lack of transparency is working to drive the tanker freight markets upwards as charterers and traders look for ships and cargoes that do not have any links with sanctioned organisations or related third parties.” The imposition of sanctions by the US Treasury’s Office of Foreign Asset Control (OFAC) on some Chinese tanker companies and persons for their alleged involvement in breaking US sanctions is creating a two-tier tanker market.

Tier One comprises companies and persons not involved directly or indirectly with companies or people on the OFAC list.

Tier Two is the rest: those who cannot clearly show that at some point in the recent past they have not directly or indirectly handled Iranian crude oil, oil products or LPG or expediated the carriage or transfer. The latter is a significant issue. Israeli-backed vessel tracking service Windward’s director of business development Omer Eilat terms this trade “oil washing”. Windward has identified three types of Iranian crude oil washing operations:

1. Unknown origin: turn off AIS in the Gulf region. A tanker doing this is waving a red flag to observers.
2. Indirect shipments: floating storage off Malaysia. Aimless voyages by VLCCs around the Malaysian peninsular with long periods with AIS switched off.
3. Third-party unloading: the counter party tanker arrives off Malaysia and goes dark, before returning to China.

The commonplace STS transfers of Fujairah could be added to this. How many of the dozens that take place everyday can show with certainty that they did not involve a company on the OFAC list – or one that could be added to the OFAC list at a later date?

This fear factor is driving a spot market that has seen a quick rejection of any business that could involve OFAC and has been a short-term boost to the tanker market. According to the Baltic Exchange, a Middle East Gulf 270,000-tonne cargo to China rose about 15 points to the mid WS 90s level at the end of the first week in October 2019. In the same week, the Baltic Exchange assessed a 270,000-tonne cargo of crude oil from the US Gulf to China at US$10.5M, while reporting one charterer had offered US$12.35M for a similar cargo to South Korea.

Clarkson Research Services translates the Worldscale into time charter equivalent earnings, and for the Middle East Gulf to China voyage the WS 114 equated to US$97,000/day, a 78% increase on the week before.

When the VLCC market rises, all tanker sector markets tend to rise and Suezmax tanker spot rates on the Black Sea to Mediterranean route leapt up 224% to US$90,000/day.

How far and how long will the spot rate rally last? Poten & Partners head of research Erik Broekhuizen was of the opinion “With heightened geopolitical risks, sanctions uncertainty, IMO 2020 looming large and – last, but not least – a market psychology where vessel owners feel that they have gained the upper hand in their negotiations with charterers, we expect the market to remain strong throughout the northern hemisphere winter and into 2020.”