Mideast Gulf VLCC rates at 11-year low in 3Q
London, 3 October (Argus) — The Mideast Gulf very large crude carrier (VLCC) market fell to the lowest level since at least 2006 in the third quarter, largely as a result of ongoing fleet growth and Opec production cuts.
The Mideast Gulf-east Asia VLCC assessment averaged just $6.40/t for a 'typical' voyage on the route in the third quarter, the lowest average for any quarter in at least 10 years and 38pc less than the third quarter average in 2012-16.
The usual summer lull in activity and demand was exacerbated this year by rapid — and ongoing — fleet growth. Around 36 new-build VLCCs have been delivered since the start of this year, capable of transporting a combined 72mn bl. This additional tonnage more than offset any demand growth including the effect of US crude exports, which might have been expected to support rates by diverting tankers away from the Mideast Gulf to undertake voyages with long journey times.
The production cut agreement between Opec and some non-Opec producers has also contributed to the recent weakness of VLCC freight rates. Much of the cuts are concentrated in the Mideast Gulf, exacerbating competition between tanker owners to secure cargoes. Compounding the pressure on rates, the backwardation of the crude curve has encouraged a sharp drawn-down in floating storage stocks, freeing up more tankers to return to the spot market. At the end of September global floating storage volumes reached their lowest levels in around two and a half years, according to an Alphatanker survey.
There was also little or no support for the VLCC market from the recent spate of hurricanes to hit the US and Caribbean. But Hurricane Harvey did cause Aframax rates to climb in the Caribbean, as numerous tankers missed their loading dates and charterers had to scramble to secure replacements.
Rebounding Nigerian crude loadings also failed to help sustain Mideast Gulf VLCC rates. Nigeria's scheduled crude loadings totalled 178mn bl in the third quarter, up by 19pc on the same period in 2016 in large part because of the return of the Forcados pipeline following an extended force majeure. But infrastructure constraints mean Nigerian export volumes have a more direct correlation with Suezmax rates than with the VLCC sector, although cargoes are co-loaded via ship-to-ship transfers onto the larger class of tanker.
While firmer fourth-quarter demand may boost rates, around 16 more VLCCs are scheduled to reach the market this quarter. This should maintain the pressure on freight rates, although some of those deliveries might be delayed or deferred until next year.