Saudi cuts support US VLCC earnings premium

Saudi Arabia's unilateral 1mn b/d production cuts have helped boost very large crude carrier (VLCC) earnings on the US Gulf coast to a premium over VLCCs in the Mideast Gulf for seven weeks, the longest span this year, as refiners in the Asia-Pacific region look to the Atlantic basin for replacement supplies.

The US-China VLCC time-charter equivalent (TCE) rate, which represents daily earnings for shipowners, has held a premium to the Mideast Gulf-China rate since 21 July, according to Argus data, on the back of the Saudi production cuts that began in July and have since been extended through the end of 2023.

Scrubber-fitted VLCC earnings on the US Gulf coast held a $15,271/d premium over the Mideast Gulf on 7 September, although earnings have fallen on both routes since late June. Mideast Gulf-China VLCC daily earnings sank to a nearly 15-month low of $10,616/d on 7 September, compared with a four-month low of $25,887/d for US-China.

Higher VLCC earnings in the US Gulf coast compared with the Mideast Gulf could entice more shipowners westward after discharging in east Asia, which would pressure rates lower in the short term. Once hired, though, longer and more frequent voyages to Asia from the US could offset some of the downward pressure from weak demand in the Mideast Gulf.

Less oil on water weighs on global rates

Opec+ production cuts and the additional voluntary cuts from Saudi Arabia and Russia led to an 11-month low in oil on the water in late August, according to data from analytics firm Vortexa, decreasing tanker utilization and piling downward pressure on global rates. The 1mn b/d Saudi cuts in the world's main VLCC hub equals about 15 fewer VLCC fixtures per month.

Since the cuts began weighing on the tanker market in late June, rates have trended lower, with the US-China rate down by 29pc to $3.51/bl for WTI on 7 September, the lowest in four months, and the Mideast Gulf-China rate down by 57 pc to $1.31/bl for Arab Light, the lowest since June 2022.

Although the US-China rate is down, the losses have been partially offset by refiners in the Asia-Pacific region seeking replacement supplies from the Atlantic. Chinese receipts of US crude, primarily light sweet WTI, are likely to hit 500,000 b/d in November, Argus surveys indicate, compared with about 410,000 b/d this year through August, according to Vortexa.

Chinese imports of WTI dipped in August-September when companies focused on securing supplies of sweet Brazilian crude. But in July, as the cost of both Brazilian and Mideast Gulf spot cargoes shot higher, Chinese companies piled into the market for US crude.

Owners opt for transatlantic cargoes in downturn

VLCC rates to Europe have also been pressured lower by the glut in tonnage. On 7 September, the US Gulf coast-Europe VLCC rate sank to $1.40/bl for WTI, the lowest since June 2022, as shipowners positioned for US Gulf coast cargoes opt for 17-day transatlantic voyages rather than lock in to 53-day voyages to China ahead of an anticipated rally in the fourth quarter.

Forward freight agreements (FFAs) for VLCCs from the US to China for September, October and November contracts were $3.61/bl, $4.08/bl and $4.34/bl on 7 September, respectively, including load-port fees, indicating the futures market expects rates to rise heading into winter.

By Tray Swanson

USGC-China VLCC earnings spread over Mideast Gulf-China