Growing backwardation in the 2mn bl very large crude carrier (VLCC) forward freight agreement (FFA) market suggests relief on freight costs is coming to the oil industry.
Since 2 November, the January FFA contract for VLCC freight on the Mideast Gulf to Asia-Pacific route has plummeted by 50pc to the equivalent of about $13/bl, with a discount to the spot price doubling to $21/bl. Backwardation occurs when prompt prices are higher than forward values.
This is welcome news for oil importers, for whom freight bills have risen to as much as 30pc of their landed crude costs and producers who have sold at discounts as wide as $30/bl.
Much of the decline in the VLCC futures market follows the Democrats' overwhelming victory in the 3 November US midterm congressional elections, which may limit US president Donald Trump's ability or appetite to escalate the war with Iran and therefore lower the risk of Middle East ship attacks.
"All eyes are on how the changing political landscape in the US impacts the conflict with Iran," said a freight futures broker earlier this month.
The risk of ship attacks in and around the strait of Hormuz, which are grimly pacing about one per day since October, has birthed the highly inefficient Hormuz shuttle trade that helped drive tanker rates to October's record highs. The shuttle tanker fleet, which numbers about 50 tankers according to Vortexa, loads cargoes in the Mideast Gulf, transits Hormuz, and transfers those cargoes onto mainstream tankers waiting in the Gulf of Oman. The operation often comes with lengthy waiting times, which absorbs shipping capacity.
The removal of Hormuz attack risk on commercial shipping would likely remove the shuttle tanker trade, tanker owner DHT chief executive Svein Harfjeld said, potentially returning shipping capacity back into mainstream trades.
A more stable strait of Hormuz would also lower war risk insurance premiums and cut down on long-haul Mediterranean-Asia shipments via the Cape of Good Hope, which would have the same effect of adding shipping capacity back into the market.
Tanker rates decline, but Hormuz no safer
But a Democrat-controlled Congress does not ensure the Hormuz ship attack risk drops.
"For now, little has changed [in the tanker market]: Hormuz transits remain a key uncertainty," shipbroker Gibson said on 6 November.
Slowing chartering activity has lowered the spot tanker market from its October peaks, with the Argus Crude Tanker Index, a composite of 15 major crude trading routes, falling by 48pc since 9 October to $14/bl, higher than at any point prior to the war. In the same time period, the Mideast Gulf to Asia-Pacific VLCC rate has dropped by 8.3pc to $32.82/bl, also well above any point prior to the war.
The extent to which the freight declines continue depends on the risk to commercial shipping through the strait of Hormuz.
The UK Maritime Trade Operations (UKMTO) has reported 12 incidents involving vessels in the Mideast Gulf since the beginning of November, including one on Wednesday.
