Freight rates for US Gulf Coast loading VLCCs and Suezmaxes are expected to remain low until the second or third quarter of 2021, as the coronavirus pandemic continues to hamper tanker demand.
Freight rates for VLCCs on the benchmark 270,000 mt USGC-China run have been below lump sum $5 million since the beginning of September, with the majority of market participants looking towards a potential uptick in freight not until Q2 or Q3 of 2021.
Bullish mid-2021 freight projections have centered on the hopes of a widespread COVID-19 vaccine deployment to bring a return in oil demand, boosting crude production and waterborne flows to refineries.
Global oil demand is expected to rise by 6.3 million b/d in 2021, after falling 8.7 million b/d in 2020, according to S&P Global Platts Analytics.
Looking to Asia
Uncertainty in the European refining sector and a second wave of lockdowns in the region have market participants expecting limited demand for Suezmaxes and smaller dirty tankers in the short term — ships that typically make trans-Atlantic voyages. Additionally, the return of Libyan crude production is expected to prompt less interest in European buying of US-origin crudes.
Increased Northeast Asian demand is providing a glimmer of upside for the Americas VLCC and Suezmax markets, as an uptick in long-haul voyages east could further boost ton-mile demand.
There was a total of 864,000 b/d of US crude shipped to China and South Korea in October 2020, almost 30% of total US crude exports during the month, according to US Census Bureau data. That was a significant increase from October 2019 when 395,000 b/d of US crude was exported to China and South Korea.
Fixtures to Asia are rising. There were seven fixtures reported for VLCCs loading in the USGC with Asian destinations in November, compared to 16 fixtures set to load over the course of December, according to Platts fixture logs. There are so far six ships slated to load in January.
Expectations that the incoming Joe Biden administration could be more favorable to trade between the US and China could bring US crude exports to China to just over 1 million b/d in 2021, according to a Dec. 10 Alphatanker report.
VLCCs account for 66% of business on the USGC-China voyage and Suemaxes 26%, the report said.
Some market participants, however, believe the recent surge in activity will not be enough to bolster rates
“China is taking a lot of crude right now but in reality there are still so many refineries that are shut,” a charterer said.
Heavy Chinese buying created major port delays along the Chinese coast, which lent support to rates along with a significant number of tankers tied up in floating storage, delaying a build in available tonnage for the spot market.
Floating storage economics have returned to unfavorable levels and are expected to remain so as the global crude market continues to shift further out of contango.
There were approximately 96 VLCCs and 24 Suezmaxes still employed in floating storage globally at the end of November, according to S&P Global Platts Analytics.
Total VLCC fleet capacity growth is expected to increase by only 2.7%, down from the 4.7% projection for 2020, Platts Analytics data shows.
Earnings waiting game
Lower bunker prices have kept shipowner earnings afloat in a low freight environment, but bunker prices are rising again.
The cost of Houston 0.5%S marine fuel has averaged $390/mt delivered so far in December, up 15% from November, according to Platts data.
Many shipowners are going to see better-than-expected end-of-year results, saved by long-term charters fixed when freight rates were higher.
However, as many time charter agreements draw to a close, some charterers are hesitant to take out ships on period charter and stay in the spot market environment, sources have said.
“Charterers are going to keep from engaging in the term charter market,” a charterer said. “People were booking at rates way too far from the actual physical markets and it’s just unrealistic.”