How long can crude tanker rate rally last and how could it end?
TANKER markets keep chugging along in boom territory, with very large crude carrier rates still topping six figures per day.
Now that sky-high fourth-quarter profits are effectively in the bag, the question for tanker owners and investors is: How long can this upcycle persist? The answer hinges on another question: What is driving this rally?
If the driver is a one-off event, or a fleeting confluence of such events, rate strength could dissipate when circumstances change — as the VLCC market has seen so many times in the past.
If the driver is oil demand growth exceeding vessel supply growth, exceptionally profitable rates would be more sustainable.
Brokerage BRS pointed to the temporary nature of rate spikes over the past six years, driven by US sanctions on Cosco tankers in October 2019, the pandemic effect in March-April 2020, Russia’s invasion of Ukraine in 2022, and the Israel-Ukraine conflict this June.
“In each of these incidents, earnings for VLCCs — and to varying degrees, other tanker segments, in a trickle-down effect — were stimulated by ‘black swan’ events, rather than fundamentals.
“In the absence of an exogenous event driving the increase this time around, the current era for VLCC earnings feels slightly different,” said BRS.
“The fundamentals underpinning this wave suggest that the current VLCC rally has legs. There currently seems little possibility of VLCC rates and earnings returning to the lows of 2024 and 2025 in the next year.”
That said, there is an exogenous event this time around: heightened sanctions pressure is having a greater effect on crude supply chains than in the past.
Crude in transit
Vortexa’s oil in transit data implies that current market strength is due to sanctions fallout coinciding with stronger flows of non-sanctioned barrels to Asia from the Middle East and, more importantly, from the Americas.
There were 1.37bn barrels of crude and condensate in transit on November 14, higher than the peak of 1.35bn barrels during the floating storage boom in May 2020.
“It’s pretty striking that we can have higher oil at sea at this point in time, when oil prices are still above $60 and largely in backwardation,” said David Wech, Vortexa’s chief economist, during an online presentation on Tuesday.
Oil at sea has increased by 240m barrels between August 31 and November 14, according to Vortexa data. Of that incremental gain, 29% or 70m barrels was from Iran, Russia and Venezuela; 34% or 80m barrels was Americas volume headed to Asia; and 23% or 54m barrels was Middle East volume.
“Most of the incremental supply this year is coming from two places: first, non-Opec barrels from the Americas, and second, distressed or sanctioned barrels,” said Claire Jungman, Vortexa’s director of maritime risk and intelligence.
“Sanctioned flows heading to Asia are part of what’s jamming things up. They move inefficiently instead of clearing quickly, and you end up with record amounts of oil on the water. It looks like oversupply, but much of it is essentially locked away from refiners who actually need it.
“Iran is a major part of the crude-on-the-water build that we’re seeing globally. The dark fleet is basically at maximum utilisation. Iran is running out of places to store crude, at sea or on land, especially as China has recently taken fewer barrels,” said Jungman.
According to Wech, “Iran is starting to feel the [sanctions] pressure, because it has only one customer out there, which is China.”
Higher on-the-water barrels from Russia are due to a combination of new US sanctions and higher exports. Russia is exporting more crude as it refines less diesel following Ukrainian attacks on its energy complex.
“We’ve seen much higher supplies of Russian crude over the last several months,” said Wech.
The higher Middle East exports on the water do not point to any supply chain disruptions. Cargoes are unloading smoothly. “The 54m barrels [versus August] is not necessarily a big volume given how massively Middle Eastern crude exports have increased over the last couple of months,” said Wech.
The increase from the Americas to Asia is particularly important to VLCC tonne-miles, and as with the Middle East volumes, higher Americas oil on the water does not point to supply chain problems.
“It’s a simple logistical requirement,” said Wech. “If you’re sending more oil a very long distance, you will have a buildup of oil at sea. Outside of what’s going to Asia, we haven’t seen any change in terms of oil at sea from the Americas market.
“So, the story here is that the marginal barrel from the Americas has been sent to Asia over the last couple of months. And a huge chunk of these extras supplies from the Americas has not yet arrived in Asia.”
According to BRS, there were 101 VLCC loadings in Brazil in August through this month, up 42% year on year, and 19 VLCC loadings in Guyana, up 73%.
The buildup of oil at sea has been characterised by some market watchers as evidence that oil is globally oversupplied and unloading delays are effectively floating storage, which would imply that the current trend is not sustainable.
Opec Secretary General Haitham Al-Ghais ridiculed this idea during an interview with CNBC on Monday.
“Inventories globally are still way below the historical five-year average and the market is still in full backwardation,” he said.
“In my 30-plus years in the oil business, I’ve never seen people storing oil when the market is in backwardation. That does not make sense. If there’s a new phenomenon that some reporters can explain, maybe it’s time for us to learn about it. Because, to my knowledge, you don’t store oil on ships when there’s backwardation. You don’t store oil, period, when there’s backwardation.”
Vortexa’s data on crude in transit that hasn’t moved for the over seven days — a proxy for floating storage — is very different from its data on total crude in transit.
While total crude in transit exceeds highs during the 2020 floating storage boom, the volume that hasn’t moved for over seven days is less than half the 2020 highs, and most of the current total is Russian, Iranian and Venezuelan cargoes delayed by sanctions. The floating storage level of non-sanctioned cargo is normal.
“This tells us that the market is clearly not oversupplied yet,” said Wech. “The supply chain [with the exception of sanctioned barrels] is moving smoothly. People are requesting these barrels at this point in time. And you don’t have pressure on oil prices so far.”
The end game
One variable is whether the recent jump in crude tanker cargoes is due to sustainable demand driven by economic growth, or by Asian importers replacing cargoes from Russia, Iran and Venezuela that are delayed by sanctions.
Wech told Lloyd’s List: “There is definitely a good fit with interest in looking for replacement barrels. But it’s always a question of what flows are driven by demand ‘pull’ or supply ‘push’.
“I see a push element in it. If supply grows a lot, which it did, especially over the last three months from the Americas, the barrels need to find new homes.”
How could the crude tanker rally end? For crude tanker owners and investors savouring today’s stratospheric spot rates after years of disappointment, this may sound like a “champagne problem”, but some outcomes would be better than others.
One theory is that sanctioned barrels will ultimately be unloaded after delays, the shadow fleet* network will be reconfigured to work around sanctions and go back to business as usual, and Asia will no longer need as many incremental non-sanctioned long-haul barrels from the Americas.
If so, there could be hangover effect as current drivers unwind. The floating storage boom in the early days of the pandemic was followed by a slump for tankers.
“I do tend to think in that direction,” said Wech when asked about a potential hangover effect.
“But this requires a supply side reaction: lower supplies from Opec or also from Russia and Iran, making room for Americas barrels,” he explained. In other words, the “push” would need to be reduced to match a lower “pull”.
“Otherwise, it is more of the 2020 scenario of substantial oversupply, leading to contango and deliberate oil at sea, with positive repercussions for the freight markets,” said Wech.
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