VLCCs - just a blip, or something more fundamental?

Nov 30 2013

We make no apology for focusing on VLCCs for the first few pages of this issue, as the extent of the market rise in this sector has surprised most of us.

Gibson Shipbrokers commented that it is normal for a seasonal increase to take place around this time of year, on the back of rising oil demand and the up-coming holiday periods.

For example, the broker said that for each of the past three years, VLCC earnings on the benchmark TD3 AG-Japan route increased by $13,000-$18,000 per day between October and November. On this basis, we could have expected earnings in November of around $35,000 per day. Instead, with momentum and a strong psychological tailwind, earnings have averaged more than $45,000 per day and at their peak, hit $55,000 per day on 20th November.

Over the past three months, VLCC chartering in the AG has been constantly high at around 140 fixtures per month, something we haven’t seen in this market since the end of 2011, Gibson said.

At the same time, there has been a continuous high level of VLCC business fixed out of the Atlantic Basin going East, with 44 reported fixtures in August, 45 in September, rising to about 56 in October.

This sustained high level of fixing from both areas has created the fundamental push needed to lift the market; the psychology has since held it there, even against the potential increase in vessel speeds.

Be warned here, as Frontline said in its third quarter 2013 results presentation that a three knot increase in a VLCCs ballast speed equates to around 12.5% of extra supply.

OPEC production looks set to be slightly lower next year and if this is the case, any cutbacks are usually centred on the Middle East region. Given this scenario, together with more Middle East refining capacity coming on stream in 2014, the drop in crude exports from the AG could be more severe.

The one unknown quantity - what will happen when Iran is accepted back into the fold, which seems highly likely?

If there are still some questions as to what will happen in the Middle East, the Atlantic Basin VLCC prospects seem clearer. The fact that VLCCs now regularly ballast to West Africa to pick up eastbound cargoes is clearly supporting the VLCC market and the need to do this has increased in recent times, Gibson said.

This rise in West Africa-East VLCC trade can be put down to the huge success in US fracking. The major increases in US oil production have been seen in very light crude and as a result, removed the US import requirement for light grades from West Africa, which was typically a Suezmax trade. These crude volumes don’t just disappear; they find a new home, which has mostly been the VLCC trade to Asia/Pacific.

This trend is forecast to continue next year and beyond resulting in even more VLCCs trading from the Atlantic going East.

However, Gibson warned that its base forecast is that next year the loss of AG VLCC cargoes will be greater than the gain in the Atlantic Basin. So, based on a further increase in VLCC supply, we would normally expect a weaker VLCC market in 2014. But, as mentioned, the one major uncertainty is still Iran.

As has been seen in the MR sector, on the back of a firming rates comes the ordering of new tonnage. Although there have been a few rumoured VLCC orders and newbuilding resale deals reported, we need to keep the lid on any ordering spree.

Again quoting Frontline, there were still 56 VLCC newbuildings to come as at the end of the third quarter of this year, amounting to 9% of the current fleet. We cannot point to the single hull phase out any more for salvation, as, according to Fearnleys, there is only one single hull VLCC left trading.

Another of John Fredriksen’s vehicles, Ship Finance took the market by surprise by announcing the scrapping of two 1998 and 1999-built VLCCs. However, this decision was not market based, as the company did not want to spend the money putting the vessels through their forthcoming special surveys.


Conversion candidates

Normally, large tankers built in the 1990s/early 2000s would find a home as FPSO, or FSO, conversions, of which there are still undoubtedly more to come and not just for the Brazilian market.

Older VLCCs are not easy to upgrade without spending a lot of money on them and doubts have been expressed by Euronav for instance on the merits of Eco-VLCCs. It is almost impossible to radically change a large tanker’s hull shape and so improved operational efficiency is the key to saving money here (see page 8).

If the current charter rate hike continues, there is no doubt that private equity firms will also be seen entering the market, as indeed, they have in the MR sector.

It will be interesting to see if ‘Peter G’ and his GenMar team do finally get their hands on Maersk’s 15 VLCCs, having hauled themselves out of near bankruptcy just recently. Are there more potential VLCC movers and shakers out there ready to pounce?

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