Coronavirus not only factor weighing on Jan-Feb freight

Shifts in tanker market fundamentals aside from the coronavirus outbreak weighed on dirty tanker rates in January-February.

VLCC rates on the Mideast Gulf-east Asia route tumbled from the start of the year's peaks, dropping from $28.61/t on 2 January to $11.49/t on 28 February, with many participants attributing the drop to the coronavirus outbreak. But other changes in fundamentals probably had a greater impact than the outbreak.

Crude deliveries to China slowed to 8.8mn b/d in February, down by 7pc from January but higher on the year, based on data from oil analytics firm Vortexa. That said, the lunar new year occurred in February last year, probably contributing to weak February imports then. The moderate contraction in crude deliveries was unlikely to be the sole factor for the fall in tanker rates since the start of 2020.

A drop in journey times in February probably contributed to weaker rates, as China ramped up its crude imports from closer supplies. Its take of Saudi crude ramped up to almost 1.8mn b/d in February, 35pc higher than in February 2019. Average journey times for crude deliveries to China were just below 40 days in February, down from around 43 days across all vessel classes in February 2019, effectively increasing tonnage supply.

The crude tanker fleet grew markedly in 2019, with rapid vessel deliveries and few demolitions, while scrubber installations probably delayed the impact of fleet growth on rates. But as scrubber installations slowed in recent months, vessel availability was boosted by the fleet's net growth from 2019.

And while the implementation of the IMO 2020 regulation initially offered support to rates, the price differential between low sulphur fuel oil and high sulphur fuel oil narrowed markedly in recent weeks, probably contributing to lower freight costs than at the start of the year.

Going forward, VLCC freight rates may also benefit from the oil price contango, which could be exacerbated by Saudi Arabia's decision to ramp up supply . The contango price structure incentivises floating storage on VLCCs , which is likely to tighten spot tonnage availability and support rates.

Clean product exports ramp up The impact of the coronavirus outbreak may, in contrast, have supported clean product tanker markets in Asia-Pacific, given increased clean product exports from east Asia amid slumping domestic demand.

Chinese product loadings rose by 8.1pc from January to 940,000 b/d in February, while South Korea ramped up its exports by 28pc in the same period to over 1mn b/d, Vortexa data show. And both countries exported more clean products than in February last year, up by 23pc and 22pc, respectively.

Chinese refiners were already expected to export more oil products amid a slowdown in domestic fuel consumption because of the coronavirus outbreak. The drop in domestic demand last month probably outpaced cuts to refinery runs, with CNPC expecting a 36pc drop in domestic consumption in the first quarter, resulting in higher exports.

Chinese product exports to the Middle East , west Africa and Mexico had already been quicker or were on track to ramp up given ongoing shipments.

The South Korea to US west coast Medium Range rate recovered to $39.29/t on 28 February, up from its 2020 low of $33.57/t on 12 February.

The coronavirus outbreak may have curtailed vessel supply already, given the disruption to the industrial supply chain. Shipyards were delaying newbuild deliveries , thereby reducing the number of new vessels hitting the water in 2020. And some ports are keeping vessels that called at ports in affected areas offshore for several days , while some charterers may have been selecting vessels that have not called at ports in affected areas, effectively tightening the commercially available fleet.

By Nicolas Kyriakoglou

Crude Deliveries to China '000 b/d

Clean Product Departures b/d

Average crude tanker journey time to China days

VLCC Freight

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