China’s resurgent appetite for oil following the end of its strict zero-Covid policy is triggering an upcycle for oil tanker freight rates, as demand from the world’s biggest crude importer stretches the global fleet of 2mn bl very large crude carriers (VLCCs)
Global VLCC rates halved from November to January after reaching their highest in two and a half years. But rates rallied in February as Chinese seaborne crude imports increased to 9.7mn b/d from 9.1mn b/d in January and compared with 8.5mn b/d in February 2022, according to data from oil analytics firm Vortexa.
China-bound VLCC rates from the US Gulf coast, Brazil and the Mideast Gulf on 1 February were $3.51/bl on a WTI basis, $2.94/bl on a Tupi basis and $1.77/bl on an Arab Light basis, respectively, all at or near their lowest since last summer. Then China ramped up crude imports, pushing those rates to $4.91/bl, $4.30/bl and $2.51/bl, respectively, by 1 March
The upward trend has continued into March, with each of those rates steadily climbing. The long haul nature of routes from the Americas to China especially stretches the global VLCC fleet, with
voyages from the US Gulf coast and Brazil taking about 51 days and 37 days, respectively, compared with about 20 days for shipments from the Mideast Gulf.
China’s oil demand could grow by 1mn b/d this year, Argus estimates, which equals about 15 additional VLCC voyages each month. Crude importers in Asia will have to compete with the European market for WTI crude owing to shifting trade patterns, adding to upward pressure on VLCC rates. This dynamic played out in the weeks ahead of the EU ban on Russian crudecoming into effect on 5 December, when shipowners demanded a premium to leave the Atlantic basin and pushed the US Gulf coast-China VLCC lumpsum rate to $15mn, equivalent to $7.12/bl, its highest since the pandemic-induced floating storage bonanza in April 2020.
Midsize tanker demand rising too
Gains in the VLCC market have implications for smaller tankers as well. On the US Gulf coast, where midsize tankers are needed to fully load VLCCs through reverse lightering operations, VLCC demand has pressured a stretched Aframax fleet, which saw a 10pc increase in ton-mile demand in the first full year of the Russia-Ukraine conflict.
With elevated ton-miles, the floor for tanker rates of all vessel sizes is higher than in previous years, even during a cyclical slump, as when freight rates fell seasonally in January but remained well above levels a year earlier.
In the short term, the Congressionally mandated release of 26mn bl from the US Strategic Petroleum Reserve is likely to boost tanker demand on the US Gulf coast. About 285,000 b/d will be released on the Texas coast from April to June, making more crude available for export at a time when tanker demand is likely to be rising.
A supply squeeze for tonnage
A historically low tanker orderbook will add further support to freight rates. About a quarter of the 895 VLCCs in the global fleet are at least 15 years old, with only 17 such tankers on order through to 2026, according to shipbroker BRS. Most tankers are retired from the mainstream market after 20 years.
The dynamics are similar in the midsize tanker market. About 37pc of the Aframaxes and Suezmaxes in the global fleet are at least 15 years old, with 23 Aframaxes and 44 Suezmaxes on order for
delivery through to 2026.
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