Low freight, improving storage economics spur more short-term time charters

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More charterers are looking for VLCCs again for short-term time charter, as freight is dipping to a record low while crude oil contango widens.

Trafigura has booked around eight VLCCs on 3-6 months’ time charter, and Shell took two vessels for 6 months’ time charter, shipping fixtures showed. BP, Litasco, Mercuria and Unipec were also heard to have taken VLCCs for short-term time charter, ranging from 3-9 months, shipping sources said.

The time charter rate ranged from $20,500/day to $42,000/day, depending on the age of vessels and duration of time charter, the fixtures showed.

“The steep decline in tanker rates over the past three months to new lows for the year increased the potential for floating storage. Spot VLCC rates from the AG to China plunged to w25 last week [equivalent to vessel earnings of just $7,000/d, well below cash breakeven levels for a VLCC],” Platts Analytics said in a report Sept. 10.

“This should incentivize fleet operators to seek floating storage for short periods if they can get higher rates as a means of minimizing losses over the near term,” they added.

Over the past six trading months, the benchmark Persian Gulf-China VLCC rate shrunk 86% to Worldscale 31.5 on Sept. 10 from a record high of w230 on March 16, when oil companies were snapping VLCCs for floating storage during early March.

On a dollar per ton basis, the rate has dived to $6.96/mt on Sept.10 from $50.83/mt on March 16, Platts data showed.

“A few people are looking [for time charterer] but that business is more a symptom of the bad state of the present market and low demand. [It is] not a positive development. Nowhere for oil to go, so have to store it on ships,” a VLCC broker said.

“Once corona[virus] ends, will have to use this stored oil before can they increase production, so market stays depressed,” the broker added.

WIDENING CRUDE CONTANGO

A wider contango seen in the crude market structure could also result in more oil going into floating storage, industry sources told Platts.

“As contango steepens and floating storage remains cheap, it should incentivize trading houses to buy crude,” AxiCorp chief global markets strategist Stephen Innes said in a note Sept. 11.

A contango market structure — where the price for prompt crude delivery is lower than for delivery in future — may drive storage in oil from companies hoping to sell it at a higher price in future.

The prompt ICE Brent intermonth spread averaged at a contango of 50 cents/b in September so far, widening from an average contango of 46 cents/b seen in August and an average of 22 cents/b seen in July, Platts data showed. Further down the curve, the ICE Brent Q1 2021/Q2 2021 timespread was assessed at a contango of $1.25/b on Sept. 10, the data showed.

Apart from the market structure, some traders said that that storage for West African Crude, or WAF, was looking attractive, amid a Nigerian crude supply overhang.

“China is the main swing factor in crude markets over the last 2 months… they bought very cheap oil [earlier in April and May] but recently they have been running off that inventory so [they are] buying less, and WAF is the grade to get left over,” a Singapore-based crude oil trader said.

“WAF is usually the last grade to be bought by the world’s oil markets… [there is] not much of an African refining industry so it needs to be shipped long distances – it is a sweet crude and the world has an excess of sweet crude the last few years,” the trader added.

In Asia, Nigerian crude offered into tenders over the last two weeks have been passed over several times in favor of other grades, reflecting a more competitive price environment as China’s appetite shrank, Platts had reported.

SUPPORT ON SPOT FREIGHT RATES UNCERTAIN

Shipping sources are casting a doubt on whether this round of floating storage will lend some support to the spot market.

“Here have been talks about contango again on both crude and fuel. Not much moving yet. Think a lot of the new storage deals are cheap ships replacing very expensive ships fixed in March, April and early May,” a VLCC owner said.

A broker reckoned the same, saying that it will take ships away from spot market so to reduce tonnage but some of the time charter business is just to replace more expensive ships.

It is not a fantastic time charter rate given winter demand is approaching, a broker said, adding that for owners, it is just that while they see more time charter enquiries besides spot cargo.

“Time charter business itself is not enough for rally of VLCC market like earlier this year…to do this, would need more demands physically. But in view of COVID-19 and oil cutback of OPEC, there is some limit to firm up,” another VLCC shipbroker source said.

Source: Platts

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