VLCC freight rates left languishing on tanker demand shortfall

Quantum Commodity Intelligence – While the OPEC+ producer group will congratulate itself on a job well done at its latest virtual gathering on July 1, with global crude prices comfortable in the $70s per barrel territory, spare a thought for tanker owners as VLCC freight rates languish close to three-year lows.

A research paper published by Vortexa, the ship tracking and analytics firm, noted there is typically an inverse relationship between oil prices and VLCC rates.

"From a low of about $13/b in April 2020, our crude basket has since grown five-fold to $74/barrel. In sharp contrast, our basket of freight rates has dropped more than 6-fold from a high of $65/mt in April 2020 to approximately $11/mt as of June 2021," said Vortexa, referencing Middle East Gulf – Far East freight costs.

In dollar per barrels terms, freight costs are now under $2/b compared to around $9/b at the 2020 peak.

While oil demand tumbled by more than 10 million barrels per day in the wake of the pandemic, a chartering frenzy sent VLCC rates skyrocketing to meet demand for floating storage in Q2 2020 amid a record contango structure.

But with global demand still at least 5 million bpd under 2019 levels, the shortfall has been felt in the chartering market, while steep backwardation in crude markets has slashed demand for floating storage. 

Additionally, tanker owners have also been hit hard by the cost of 0.5%-sulfur bunkers.

"These price increases are of course having a detrimental effect on VLCC owners bottom lines, as bunkers soared to close to the $540/mt level in Singapore. A grim reality is that some owners on ships lacking scrubbers can only make sense of voyages if they already have cheaper bunkers on board," said tanker brokers Fearnleys on Friday

Quantum assessed 0.5% Singapore Marine Fuel cargoes at $533.75/mt on Thursday, around $110/mt over 3.5%-sulfur fuel oil.

However, there is some better news for owners, with July VLCC demand increasing in line with rising production.  

Saudi Arabia and its OPEC+ allies hiked output by 2 million bpd in the May-July period, and are coming under strong pressure to announce further increases at next week's meeting to counter soaring prices.

Consumer nations have largely led the calls for OPEC+ hikes, but tanker owners will breathe a sigh of relief as production levels increase.