VLCC rates on pace to hit record 1Q lows
London, 12 March (Argus) — The cost of freight for very large crude tankers (VLCCs) on key routes is unseasonably weak, and average first-quarter rates are on pace to hit record lows.
Most shipowners are losing money on each voyage as daily earnings fall short of operating expenses, and the market remains burdened by a combination of heavy — and growing — tonnage oversupply, the Opec production cuts and less-favourable west-east arbitrage opportunities for crude.
The Mideast Gulf-east Asia VLCC assessment is on track to average just $6.80/t this quarter. This would be the lowest first-quarter average since at least 2006 and is just over half the $13.52/t first-quarter average logged over the past ten years.
Freight rates on the route have trended downwards in recent weeks, and have languished at less than Worldscale (WS)40 — equivalent to just $6.68/t for a 'typical' voyage on the route — since early February. Worldscale rates have subsequently slipped into the mid-WS30s, meaning projected VLCC earnings on the Mideast Gulf-east Asia route are approaching as little as $4,000/d, well below likely breakeven of an estimated $11,000/d.
But shipowners continue to compete for such voyages in an attempt to maintain some cash flow.
The west Africa-China VLCC assessment is on pace to average $11.28/t this quarter, again the lowest since Argus began covering the route and just over half the $21.15/t average for the time of year in 2008-17.
Tonnage oversupply remains the single largest factor to weigh on VLCC freight rates. Around 47 newbuild VLCCs were delivered in 2017, far outstripping the 22 demolished or converted for other uses. Around 50-60 VLCCs are scheduled for delivery this year, which would equate to 7-8pc of the global fleet, followed by another 40 or so in 2019.
Scrapping rates have accelerated recently but it is likely to be some time before that is sufficient to support rates. There is little or no demand to use VLCCs as floating storage, although if this were to change that may help alleviate the oversupply.
Another problem for shipowners is the Brent-Dubai EFS differential is still relatively wide, which acts to discourage eastbound crude shipments from the Atlantic basin toeast Asia. So far this quarter the spread has averaged $3.46/bl, up from $1.49/bl in the first quarter of 2017 and from an average of $2.90/bl over the same period in the last five years. That in turn weighs on demand for tankers in west Africa, and with it tonne-mile demand for the VLCC sector as a whole, by reducing the number of long-voyage shipments to east Asia. The wide differential also exacerbates the concentration of tankers competing for cargoes in the Mideast Gulf, and so contributes to the weakness of that region's freight sector.