Weight of Freight: These 3 factors could spur a crude freight rebound

Author Nicholas Watt, Editorial Manager, Freight

The tanker chartering rush that pushed crude freight rates to record highs in November 2022 is over, but the question remains: what could cause rates to rebound?

For crude importers, a return of high rates would pressure energy prices higher, further threatening fragile economies. For traders, higher rates may weaken the economics of shipping crude on long-haul routes, such as from Texas to crude-thirsty China, a route whose rate has fallen to under $4/bl from $7.12/bl on 25 November 2022 for 2mn bl very large crude carriers (VLCCs). 

Dirty tanker rates vs bunkers 

Here are the freight market movers that charterers will be viewing with trepidation, and tanker operators with hopeful expectation. 

1. A tanker supply squeeze

A sudden shortfall in crude tanker supply could come from a number of areas and send rates higher this year. Foremost, a regulatory crackdown on the tankers in the so-called “shadow fleet” either due to safety precautions or geopolitical considerations could tighten the market. Over 600 unique tankers have loaded crude in Iran, Venezuela or Russia in the last six months, per vessel tracking. There are likely more involved in these trades because of tracker evading and ship-to-ship transfer operations that obscure a cargo’s origin. A further heightening of geopolitical tensions or a serious accident on a vintage tanker could spur regulators to take a harder line against tankers involved in such trades. Since the 5 December European ban on Russian seaborne crude, some energy traders, such as Shell, are already taking matters into their own hands and refusing to charter vessels that are involved in carrying Russian cargoes. 

History has shown that regulatory intervention on tanker supply can roil the tanker market. In September 2019, the US Treasury Department sanctioned a subsidiary of China’s state-owned shipping company Cosco for alleged involvement in transporting Iranian cargoes. The move effectively blacklisted a sizeable chunk of the tanker fleet and sent rates soaring. 

Count on volatility for crude tanker freight 

A supply squeeze could also come from an extended bottleneck at one of the world’s choke points, such as what happened last month in the Turkish straits. In December 2022, a dispute between the Turkish government and maritime insurers related to Russian cargoes caused a build-up of 30 vessels in the Black Sea.

2. A healthy Chinese post-lockdown crude appetite

A resurgent Chinese economy would mean higher Chinese crude imports, which would absorb available tonnage supply and allow tanker owners to raise rates. Following the easing of Covid-19 restrictions, the country’s crude demand could rise by as much as 1mn b/d this year, a figure based on expected year-over-year GDP growth of around 5pc. Anecdotal data suggests the country’s crude appetite is already growing. China’s state-controlled Sinopec has already upped its crude purchases by 15pc in the first quarter compared with October-December of 2022. 

A boost in China’s crude imports would have an outsize effect on the very large crude carrier (VLCC) segment, which is the most common type of tanker that ships crude to China. A 1mn b/d increase wUS crude exports reached a record high of around 3.6mn b/d last year. Even though US production growth is slowing, the country’s output itself is still rising. Excess supply from US production, which is expected to surpass its 2019 record of 12.32 b/d this year, is likely to hit the water for export to Europe and Asia and help tie up tanker supply. Much of the excess US supply was shipped to Europe to replace Russian barrels last year, providing a net increase in ton-mile demand as US remains a more geographically distant crude supply to Europe than loading points for Baltic and Black Sea supply. ould equate to about 15 more VLCC voyages to the country per month. With some of the expected incremental supply coming from as far away as the Americas, ton-mile demand would also benefit. A one-way journey to China from Brazil — from which Sinopec is already raising its purchases — takes about 37 days, equivalent to two one-way Mideast Gulf-China journeys.

3. A new US crude export record

US crude exports reached a record high of around 3.6mn b/d last year. Even though US production growth is slowing, the country’s output itself is still rising. Excess supply from US production, which is expected to surpass its 2019 record of 12.32 b/d this year, is likely to hit the water for export to Europe and Asia and help tie up tanker supply. Much of the excess US supply was shipped to Europe to replace Russian barrels last year, providing a net increase in ton-mile demand as US remains a more geographically distant crude supply to Europe than loading points for Baltic and Black Sea supply.

While rising east Asian demand, from China in particular, could propel more US crude cargoes eastward this year, the growing market for US crude appears to be Europe as the region pivots away from Russian crude of similar quality. The trend of VLCCs taking Americas crude, particularly US crude, to Europe in addition to smaller Suezmaxes and Aframaxes is likely to continue this year. This factor was partially responsible for the run-up in dirty tanker rates in November 2022 and could repeat itself this year. A spate of transatlantic VLCCs bookings could keep VLCCs in the Atlantic basin, leading to a shortfall of supply in the Mideast Gulf, which loads the majority of VLCC-carried crude. 

 
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