Viewpoint: Mideast VLCC rates to remain under pressure

Very large crude carrier (VLCC) rates in the Mideast Gulf are likely to remain under pressure in 2020 amid continued fleet growth and deeper Opec production cuts. On the flip side, scrapping could support rates, as could geopolitical risk. Meanwhile, the net impact of the looming IMO 2020 sulphur cap is uncertain.

Shipbrokers estimate that more than 60 new VLCCs were delivered this year, while just seven were scrapped by early December. That is a significant net increase — enough to carry more than 120mn bl. In contrast, around 34 VLCCs were delivered and as many as 39 were scrapped in 2018.

The 2019 fleet expansion ought to weigh on VLCC rates next year. But one shipbroker suggested that the new vessels have merely helped replace tonnage restricted or excluded by US sanctions, resulting in little net movement overall. After the glut of newbuild vessels this year, deliveries are projected to slow down to around 40 in 2020 and 19 in 2021, although those scheduled deliveries are not insignificant, equivalent to around 9pc of the global fleet.

Some in the market previously predicted that given the ageing profile of the VLCC fleet, the pace of scrapping would accelerate in 2019 before IMO 2020 raises bunker costs, particularly for less efficient vessels. But there is arguably a greater likelihood of accelerated scrapping in 2020, as vessel values depreciate and around a quarter of the fleet will be more than 15 years-old.

Scrubber installations in preparation for IMO 2020 helped to tighten VLCC supply in the fourth quarter this year and that will remain a factor in 2020. Shipbroker Clarksons expects a quarter of the VLCC fleet will have scrubbers installed by the end of 2019, rising to 34pc by the end of next year. Many are already booked under long-term contracts, with the expectation that they should make significant savings on fuel costs and undercut vessels using 0.5pc sulphur fuel oil. That could significantly expand the number of VLCCs operating in the lower, discounted tier of the market — currently occupied by older, ex-dry dock or otherwise less desirable tankers — and potentially act as a drag on rates overall. But on the other hand, higher bunker fuel costs might encourage owners to reduce speed, which would in turn support freight rates by effectively reducing tonnage availability.

And there are also concerns about the availability of IMO-compliant bunker fuels — both geographically and in terms of quantity and quality. If there are supply constraints or compatibility problems, or if vessels have to divert or face delays bunkering, then that would constrain tanker availability and support freight rates.

Opec and its non-Opec allies have agreed to deepen their combined production cuts to 2.1mn b/d in the first quarter next year from 1.2mn b/d. But this includes a voluntary reduction of 400,000 b/d by Saudi Arabia that is already in effect, so the impact on tanker demand will be more limited than the headline figure suggests.

US sanctions on crude exports from Venezuela and Iran, as well as on Iran's sizeable NITC tanker fleet and vessels associated with Venezuelan shipments, look set to remain for the time being. Restrictions on a division of Chinese shipping giant Cosco earlier this year show the potential for additional serious disruption arising from Washington's sanctions regime. Continued tensions between Iran and some of its Mideast Gulf neighbours could also lead to further freight market volatility, including the possibility of higher war risk insurance premiums on freight rates. The US-China trade war has strangled burgeoning demand for VLCCs on that route this year, but the prospect of a resolution to the dispute has increased after the two sides recently concluded negotiations on an interim trade agreement. In any case, US crude has found alternative markets in east Asia, which should continue to support tonne-mile demand growth.

By Simon Ferrie