2023

Our Head of Research & Insight, Mette Frederiksen, takes us through the development process behind the latest update to our popular VLCC app that provides an indicative CII rating and score for every voyage fixture based on Tankers International’s world-leading VLCC market data.

The volume of data that we all work with on a daily basis, coupled with the latest regulatory updates, means that it has never been more important to ensure that information is shared to enable transparency and collaboration. Therefore, introducing indicative voyage CII scores on the Tankers International VLCC Fixture app was a clear next step to supporting charterers in understanding their CII options and assisting shipowners and managers in understanding how others are – or aren’t – achieving good ship ratings.

Since the CII regulation entered into force in January 2023, there have already been some challenges with the regulation and concerns about how transparent this data will actually be. Our latest app update aims to allow shipowners, charterers, and regulators to openly see what issues they can identify using vessel CII scores and ratings. In turn, this can help to build informed policies and help regulators understand if and where reform may be needed.

The indicative CII scores are calculated based on internal speed and consumption data from vessels that have traded in our pool and dates back to 2000. This covers more than 250 VLCCs, of different ages, designs, and constructions. Where no version of a particular VLCC has previously been entered into the Tankers International VLCC Pool, the app uses the nearest possible match based on parameters including age, build yard, and engine design.

The CII feature also includes a ‘feedback’ tab for each fixture listing so that users can report any additional information or errors. This information can only be seen by the Tankers International team, and the messages sent cannot be seen on the app. Shipowners or ship managers who believe there is an error in our calculations should use this feature to report the error, and they can choose to provide a breakdown of actual representative data for the vessel.

The Tankers International app development team will verify this data before updating the vessel’s statistics, to provide the most accurate information possible.

This, alongside other data points like market demand and fixture frequency, is used by Tankers International to create an industry-wide benchmark speed. The Tankers International benchmark has been used and honed over two decades and provides incredibly accurate indicative figures for bunker consumption.

Given the ever-changing landscape of our industry and the uncertainty that these regulations have caused, it is now more critical than ever before that industry members have access to quality data, faster to support decision making for all stakeholders. This latest CII feature will allow users to integrate even more quality data and analysis into negotiations and strategic direction.  This additional layer of insight and market transparency will benefit the entire VLCC sector.

China is a key driver of the VLCC market. The sheer scale of the country’s need for oil and an infrastructure system built to accommodate large crude oil tankers means that shipping crude oil in the largest possible parcel sizes ensures economies of scale and a more cost-efficient transportation solution.

On the flip side, this also means that when the Chinese economy and the country’s demand for oil reduces, we see an immediate effect in the VLCC market. This demand slowdown was, in effect, what happened during the first half of 2022. While the smaller tanker segments benefitted from freight market shocks early in the year on the back of the conflict between Russia and Ukraine, in fact, the conflict did not directly impact the VLCC segment as this large vessel group rarely is involved in loading Russian oil.

In the early months of 2022 the VLCC market was significantly impacted by declining oil demand in China. The country was struggling with a resurgence in Covid-19 infections that caused new lockdowns and more travel restrictions. In addition, a slowdown in manufacturing activity caused industrial production decline, which reduced oil demand even further.

As a result of demand slowing and lockdowns impacting its industry, throughput in Chinese refineries collapsed to two-year lows as state-owned and integrated independent refineries ran at nearly 75% of capacity in April, while some private plants operated at just 50%, according to Platts. Intelligence from data provider Kpler shows that the reduction in refinery throughput boosted inventories in China which remained elevated through May, June and July before declining into the autumn.

This decline in refinery activity and resulting inventory build-up slowed down the country’s crude oil imports. At the same time, the price of oil was rising which did nothing to encourage more buying. As a result, we saw Chinese demand for VLCC tonnage decline. While we counted 107 monthly liftings destined for China in 2021 and a similar count in the first four months of 2022, this number dropped to an average of just 95 liftings in May, June and July.

In late summer, China began to re-emerge from its Covid restrictions. Increased industrial activity and greater freedom of movement both added to a demand surge in the second half of the year. This growth was further supported by new product export quotas that required refiners to demand increased volumes of crude oil. With oil demand improving and refinery runs increasing, we noted a significant impact on VLCC cargoes booked for discharge in China. In fact, we counted as many as 132 liftings in October, with an average of 125 monthly liftings in the final quarter of the year.

Looking back at historical data, we find an almost perfect correlation between both Chinese oil demand and VLCC liftings and refinery runs and VLCC liftings. It is, therefore, reasonable to expect this trend to continue. We can look at projections for oil demand and refinery runs in China to understand what we may expect going forward regarding VLCC activity bound for the country.

The latest estimates for China’s oil demand in 2023 peg growth levels at close to 6% on the back of the continued easing of Covid measures and economic recovery. We have seen a recent surge in infection rates in China and a temporary decline in demand. Yet, expectations are that this will be managed, and that demand will resume its growth trajectory from the second quarter. Likewise, China’s crude runs will initially be affected by the weaker demand picture, but this is also expected to reverse. We are therefore optimistic that China will continue to provide strong support to the VLCC market throughout the year.

We already count 120 global VLCC liftings destined for China in January and February, with approximately 60% emanating from the Arabian Gulf and the remaining from the Atlantic basin. While it is difficult to predict the exact number of liftings we will see in the VLCC space, the correlation theory indicates we can expect numbers to rise by around 5 cargoes per month compared to 2022 actuals. The great benefit to the VLCC market will come from the continuous pull of crude from the Atlantic basin, which comes with extra long tonne miles.

As one of the key drivers of the VLCC market, we continue to closely monitor China and the country’s energy data. The current outlook is positive with an economy in recovery mode, rising oil demand and a refining industry that is forecast to remain strong. The current crude trade flow mix into the country already supports a healthy VLCC market, and we look forward to a year of continuous growth from the economic powerhouse that is China.

Now that we have closed the books on 2022, we are looking back at a year of ups and downs. The year began with high expectations of a long-awaited VLCC market recovery, and although the recovery was slow to kick off in the VLCC space, the year ended on a high. 2022 also brought added complexity to VLCC trading strategies, as a result of changing trade patterns and new regulatory requirements around the Carbon Intensity Indicator reporting.

We used our detailed VLCC fixture database to digest last year’s events and analyse how they helped to reignite the freight market for the largest tanker segment.

Join us as we review our internal cargo count dashboard.

First, we need to look at absolute growth in VLCC cargo numbers. Counting cargoes fixed in the spot market, we noted an average increase of 41 liftings per month in 2022 compared to the previous year – this represents a growth level of 19%! To provide greater context, this compares to an annual growth rate of circa 4% across the last 10 years, before the pandemic impacted the market. We saw a huge drop in oil movements during 2020 as Covid restrictions kept global mobility and productivity at a minimum. While we experienced some recovery in 2021, it was not until 2022 that the world truly began practicing “living with Covid”, and the effects of this are now mirrored in oil demand and thus tanker markets.  The year’s significant rise in VLCC cargo numbers resulted in a higher demand for VLCCs, as measured by days employed, which increased by 7%. This is in line with the 10-year average, excluding the two years impacted by Covid.

If we consider the various trade routes and how they have changed through the year, it becomes evident that significant growth was driven by the Arabian Gulf (AG) market. This load region saw an additional 35 monthly liftings across the year. This development runs parallel to the OPEC+ commitment to gradually add oil supply back to the market throughout the year. Following the announcement that the alliance would cease gradual additions, we noted a slight drop in cargo numbers from 186 monthly liftings in 3Q-2022 to 174 monthly liftings in the fourth quarter. This level of activity remains much higher than pre-Covid cargo counts of 160 in the fourth quarter of 2019, and it provides a solid baseline of activity for the VLCC market.

The second largest trade route in the VLCC market is West to East. This route encompasses all of the load regions in the Atlantic basin, excluding West Africa. Our fixture data indicates a monthly average of 38 liftings on this route – a slight decline from the previous year. This relatively low average, however, is marred by very low activity in the second quarter when we counted just 32 liftings per month. The driving force behind this was mainly at the receiving end, as China experienced a period of significantly reduced crude purchases.

Contrary to most other countries, China continued its zero-Covid policy through much of 2022 and lockdowns remained in place for longer than the rest of the world. China began to emerge from these restrictions over the summer months, and in combination with new product export quotas, the market saw renewed crude demand from Chinese refiners. This was the real catalyst for the buoyant VLCC market we have today. Not only did Chinese crude demand return, but China was sourcing much of the incremental barrels from the Atlantic basin. Tankers international recorded 46 liftings on the West to East trade lane each month in September, October and November.

The corresponding change in vessel demand on the West to East route indicates an overall decline. This is due to a more efficiently traded VLCC fleet, as more AG to West volumes emerged. VLCC owners were able to increasingly triangulate their trading between the AG, Europe and the Far East, reducing their overall ballast leg and, consequently the time that vessels are employed on the West to East route. The increase in vessel demand on the AG/West routes makes up for most of the decline on the West to East route.

Another game changer in 2022 was the resurgence of inter-Atlantic trading on VLCCs. On our dashboard these trades are listed as “West/West”. Europe has been pulling crude oil from new suppliers in the US, Brazil and West Africa, and on some of these routes, it became more economical to employ tankers from the largest segment. Since May, we count an average of 11 monthly liftings on these routes. The pull of VLCCs into Europe both from the Atlantic basin and the AG has given shipowners the ability to become more creative in the trading of their vessels, devising increasingly complex strategies to maximise the utilisation of their assets. This has been a welcome development!

Although the VLCC market was slower to recover than the Suezmax and Aframax markets and remained lacklustre through most of the first half, it has since returned with full force. It has been encouraging to see the market quickly adapting to added trading complexities and changing trade flows. We will continue to count cargoes and analyse any changes to trade flows through 2023. While we may not see the same uptick in absolute fixture numbers this year, tonne miles are set to continue on an upward trend with more oil moving long-haul. Given that development, we will see demand growth in the VLCC segment remain robust.