Asian benchmark VLCC freight rate hit the year’s high Thursday on the back of impending Iran sanctions, surging bunker prices and a widening WTI-Brent spread, as charterers rushed to fix their cargoes for the winter months.
For the first time this year, the key Persian Gulf to China 270,000 mt route breached the 70 Worldscale mark with China’s Unipec widely reported to have hired the Maran Aphrodite at w71 basis October 24-26 loading.
Late Wednesday, China’s newly launched Rongsheng Petrochemical Company placed the Xin Long Yang for a Persian Gulf to China voyage to move 270,000 mt crude at w70 for October 23-25 laycan.
S&P Global Platts assessed the Persian Gulf-China 270,000 mt route at w65.75 Wednesday. This corresponded to $10.43/mt or $1.42/b.
Surprisingly, the Asia VLCC market has been busy, contrary to expectations of a quiet run during the Golden Week holidays in China and a few other Far East countries.
The rates have risen sharply by w10 points over the last three trading days after meandering around the w50-w55 mark since July, before breaching the w70.
“The oil supply shortage concerns arising from the Iran sanctions and the surging crude price have triggered fixing frenzy to move oil. We have seen more China bound cargoes,” a source with a VLCC shipowner said.
The typhoon season and the fickle weather witnessed in the Far East for over a month now had resulted in the holding up of vessels at the discharge ports, thereby tightening the tonnage supply.
The widening WTI-Brent spread has also helped to create a strong demand for tonnage out of the West market, which has materialized into higher ton-mile demand, an Athens-based VLCC shipowning source said, adding that this has shortened the list of VLCCs available in the Persian Gulf.
Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same, or conversely, it offsets the increase in supply of tonnage.
The frontline Platts Brent-WTI Houston Swaps spread ended Wednesday at $9.64/b, compared with $9.20/b on September 26.
A wider spread makes the WTI-linked crudes more appealing to buyers in Asia and Northwest Europe.
SPIKE IN WEST AFRICA, CARIBBEAN VLCC DEMAND
China’s crude imports from West Africa are set to hit a seven year high this month, Arctic Securities’ Oslo-based research analyst Jo Ringheim said in a report.
Chinese refiners have purchased close to 1.71 million b/d of West African crude for October loading. The increase comes as the trade dispute with the US over tariffs prompts China’s refiners to find alternative sources of crude, Ringheim said, adding that the West African crude grades are similar in quality to US Shale.
However, reduced demand for US crude loadings can impact the ton mile demand, and can eventually soften the freight rates in the medium term.
Currently, VLCC rates are tracking seasonal trends and should continue to do so as refinery demand picks up in the fourth quarter, Ringheim said.
VLCC rates in West Africa, Caribbean and the Persian Gulf, are all bullish after a long spell of lackluster activity, a Singapore-based VLCC broker said.
While the freight rate has firmed substantially, the expensive bunkers have eaten into the earnings of the shipowners, market sources said. The 380 CST delivered bunker price was at $527.75/mt Wednesday, which is up $31.5/mt week on week, S&P Global Platts data showed.
The time charter equivalent or the earnings for owners, at w70 is close to $26,000/day, a VLCC broker said, adding that the operating expense on a supertanker is around $10,000/day.
VLCC DEMOLITION BRIGADE ON AN OVERDRIVE
The scrapping activity in the VLCC segment has been robust this year with 32 vessels sent to the demolition yards, while just 11 units were scrapped in 2017, according to a report by shipbroker E A Gibson.
The poor returns on the VLCCs coupled with higher scrap prices at around $460 per light ton have encouraged shipowners to send their older vessels to the breakers.
The number of VLCC removals has exceeded the new deliveries, with 26 vessels entering the market between January and August, according to the EA Gibson report.