Mette Frederiksen

As the first half of 2024 draws to a close, the VLCC market presents a picture of moderate improvement without the dramatic boom witnessed in other tanker segments. While freight rates have exhibited a steadier trajectory compared to the volatility of 2023, peak levels haven’t quite reached the heights anticipated. But at the same time, the lows haven’t dipped as drastically either. That being said, all the right factors are in place, and the VLCC segment taking part in the super cycle is a question of when, not if.

Fundamentals

The underlying fundamentals supporting the VLCC market remain largely unchanged since the beginning of the year. The key driver continues to be a lack of fleet renewal, with minimal new deliveries offset by a significant number of vessels exceeding their traditional 20-year lifespan. Scrapping activity and other forms of vessel retirement have remained subdued due to a period of relatively strong returns and optimistic market outlooks. Additionally, the growth of the “dark fleet” persists, providing an alternative outlet for these older ships. Comparing an orderbook-to-fleet ratio of just 7% to an older fleet representing 21% of the trading fleet, the fleet profile is supportive of a tightening tonnage balance.

The recent effective closure of the Suez Canal and the wider Red Sea area, which significantly impacted product tanker markets, has had a relatively muted effect on the VLCC sector. The inherent nature of the VLCC market, where historically only a limited number of vessels utilise the Suez Canal, has meant limited disruption to the segment and a mere 4 VLCCs equivalent increase in demand due to the rerouting. This is where the product tanker segment has found surging support over the past 6 months.

The ongoing Russia-Ukraine conflict continues to play a crucial role in shaping all tanker markets, including VLCCs. Russian oil continues to be diverted to buyers outside Europe, prompting Europe to source supplies from alternative sources like the US, West Africa, and the Middle East. This dynamic translates into more inter-Atlantic trading, where VLCCs become competitive when freight economics permit. This does not necessarily mean longer tonne miles, but these routes provide access to more creative trading opportunities and allow owners to triangulate vessels and optimise their fleets.

OPEC+

The Middle East to Far East route remains the backbone of the VLCC market. While OPEC+ production cuts have restrained oil flow from the Middle East region, positive signals are on the horizon. Recent announcements from OPEC+ on their production management strategies pointed to a gradual phase-in of previously curbed production volumes starting in October. The group plans to add 2.5 million barrels per day over the following 12 months. This includes bringing back 2.2 million barrels of voluntary cuts and allowing the UAE to raise production by 0.3 million barrels per day. Additionally, the market anticipates a rise in incremental supply from Atlantic basin producers such as the US, Canada, Brazil, and Guyana. As incremental demand is expected to remain concentrated in the East, this scenario translates into long tonne mile demand for VLCCs.

The positive news continues, with forecasting agencies all projecting a rise in oil demand over the year and, in particular, during the second half of 2024 compared to the first. Much of this hinges on China fulfilling the robust demand projections predicted for the nation. China’s leadership has set itself an ambitious economic growth target and is taking proactive measures to achieve this. Historically, this proactive approach is closely linked to growth in oil demand and, importantly for the VLCC segment, a rise in oil imports. Furthermore, the optimistic demand outlook from the forecasting agencies point to growth in the Call-on-OPEC, which aligns with OPEC+ plans for a phased production increase.

The VLCC market has shown resilience in the first half of 2024. While not experiencing the dramatic boom of other tanker segments, it has exhibited steady growth with positive indicators for the remainder of the year. Stronger demand growth, the return of some OPEC+ production and continued geopolitical influences are all factors to monitor as the market navigates the second half of the year. We remain optimistic that the VLCC segment will find its moment to enter the stage and take an active part in this year’s super cycle.

As we wrap up the first quarter of 2024, the VLCC freight market continues its upward trend amid rising tension in the Bab-el-Mandeb, tightening of sanctions on companies involved in Russian oil trade, and the OPEC+ group announcing an extension of the supply curbs that were put in place at the start of the year. Yet, with Baltic freight assessments and sentiment improving, the VLCC market is on the up. So, how have these developments impacted the VLCC market, and what is the outlook for the next quarter?

While the crude tanker market looks set to face a slowdown in global oil demand growth, the outlook for growth in 2024 remains in line with what we have seen in previous years, and the outlook for the year keeps improving. This is reflected in the IEA forecasting an additional 1.3 million barrels of growth in 2024, which matches the average between 2000-2019.  We also need to remember that the fast-paced demand growth we experienced in the last couple of years was the market playing ‘catch up’ following the demand destruction of the Covid years. Demand growth will be driven by economies in the Far East, with China and India leading the way.

The OPEC+ alliance is also driving oil headlines by announcing a voluntary tightening of supply going into 2024 and a further declaration to extend the production curbs into the second quarter. There have been reports of lax quota compliance from some alliance members, and the voluntary nature of the production cuts supports this theory. Meanwhile, producers in the Atlantic basin are set to continue to add incremental supply and this will compensate for some of the tightening of supply from OPEC+ alliance, and will satisfy the demand gap in the Far East. Preliminary data from our VLCC fixture database, does not show any significant drop in fixture volume, and this is across all the major load regions.

The escalation of the tension in the Bab-el-Mandeb strait through the first quarter, with further attacks on oil tankers, has seen a significant decline in international tonnage of all types transiting the strait and the Suez Canal. The alternative trade route via the Cape of Good Hope adds considerable tonnemile to the oil trade, and there is no sign that this will change in the near future. Looking specifically at the VLCC segment and the 6-8 monthly liftings from the Middle East to Europe that historically have passed the conflict area, the majority of owners and charterers are now opting for the longer, safer transit route via the Cape. This adds around 15 days to the laden leg of the voyage, and apart from delaying crude supplies reaching Europe, it also increases tonnemile demand for the VLCC segment.

The start of this year has also seen tighter enforcement of Russian sanctions, and this threatens to once again transform the commercial framework around the trading of Russian oil. The Russian market is becoming increasingly difficult for mainstream industry players to get involved with and Russia continues to rely on the dark fleet to move its barrels. Only a few VLCCs are involved in lifting Russian cargo, and the commercial implication for our segments remains with the shift in general trade flows whereby Europe is taking more crude from the Atlantic Basin, and from the Middle East.

One of the biggest stories from this quarter has been a resurgence in VLCC tonnage ordering. The first three months of the year saw the orderbook double in size, and historically an expansion of this scale would pose a huge disruption to the freight market outlook. However, the orderbook-to-fleet ratio remains historically low even with the addition to the orderbook. The full orderbook holds 51 orders to be delivered over the next five years, equivalent to 6% of the fleet. But this compares to an ageing fleet profile of more than 200 vessels that will reach the age of 20 or older within the same time period. This means the potential for fleet exits by far exceeds additions.

Looking ahead into Q2 and beyond, the VLCC freight market looks set to continue to build on the solid foundation of cargo volumes that has persisted from last year and into this year. Recent headlines also point to both China and the US – the world’s biggest oil consuming nations – signalling the need for more oil than expected this year, driven by rising manufacturing activity and stronger-than-expected economic conditions. There is further upside ahead if the OPEC+ alliance begins to unwind production cuts, which many analysts and forecasting agencies see as a likely scenario going into the latter part of the year. Until then, the geographical mismatch between where oil demand is growing and where new supply will arise will continue to add to the tonnemile equation and to the demand for VLCC tonnage.

Tankers International’s Head of Research and Insight, Mette Frederiksen, shares her thoughts on 2023 market trends based on the Pool’s proprietary fixture data, and how oil and freight dynamics reshaped the VLCC market over the last 12 months.

In 2023, the VLCC market navigated many changes – from oil production cuts to sanctions being tightened and lifted, and as we publish this piece, serious disruption in the Red Sea, which sets to join the COVID-19 pandemic and EverGiven blockage as a historical disruptor for global shipping. However, 2023 also proved to be a highly lucrative year, with China’s oil demand boosting VLCC demand as crude oil exports from the US continued to reach new records.

Yet, beyond the sweeping trends and statements, it’s in the detail that an interesting story emerges. Total liftings revealed an average of 282 spot VLCC cargos per month in 2023, an increase of 17 from the previous year. This 6 percentage-point growth surpasses the historical average of 4% from 2010 to 2019 (the pandemic period is ignored). Considering tonne miles as a measure of vessel demand, this also rose by 6% over the year. In the context of several rounds of OPEC+ production cuts, this sustained growth showcases the VLCC market’s resilience, with these supply cuts offset by increases elsewhere in the Atlantic basin.

Go East, crude oil flows

It’s clear that tonne mile development pushed global VLCC demand up in 2023.  A closer look at individual trade routes uncovers where this trend emerged – from significant changes. The biggest rise in cargo counts came from the West to East route, with an additional 10 liftings each month in 2023 compared to 2022. This added demand for 26 VLCCs in full-time employment. This trend reflects developments in Atlantic basin-based crude export markets, where we saw suppliers in the US with exports reaching new records compared to 2022 of 4.21 mbpd, according to the EIA. Meanwhile, the likes of Brazil and Guyana continue to release more crude oil, combined with incremental demand growth being centred east of Suez.

Atlantic basin suppliers have also played a key role in developments on the West-to-West trade route, which includes increasing crude volumes going into Europe following Russia’s invasion of Ukraine. Cargo counts on the West/West route have increased from circa 3 per month in 2021 to 8 per month in 2022 and an impressive 14 per month in 2023. In the final quarter of 2023, monthly liftings from the US Gulf to Europe reached double digits for the first time, totalling 11 cargos.

Our fixture data shows that the combined liftings from the US Gulf and South America (to all destinations globally) have surged by 17 per month, totalling 55 and accounting for 20% of the total cargo count in 2023. This is a 6 percentage-point increase in market share compared to the previous year.

OPEC + drama

By comparison, the Arabian Gulf (AG) share has dipped from 66% to 61%. The monthly AG cargo count for 2023 stands at 173, a decrease from 176 in 2022. As the OPEC+ alliance has been cutting supplies, fewer barrels have been available to lift in the VLCC market. We have seen liftings to Europe and the Red Sea decline, while cargo volume to the Far East marginally increased.

The AG to the Far East trade route continues to dominate the VLCC market in terms of total cargo volume. The liftings peaked in the first quarter of 2023, when Beijing officially ditched its zero-COVID policy. However, several rounds of OPEC+ production curbs have impacted the fixture count ever since. As the alliance has announced sustained production cuts going into 2024, we may see cargo counts plateau for the time being.

Black Swans

2023 was a year where geopolitics took us by surprise, with Venezuela back onto the scene towards the end of 2023. The release of the US sanctions on Venezuela in the last quarter drove VLCC activity out of the country to 11 cargos in December, from an average 2-5 liftings per month through the rest of the year. Chinese teapot refineries have been driving this development. We also note a rise in cargoes from Venezuela to India, signifying that Indian refineries are coming back to the market since the secondary sanctions were imposed in 2020. They now vie with Chinese teapots for the discounted oil.

Another interesting development is an additional 5 cargoes per month on the Singapore to China route. This route covers the so-called “Malaysian Blend”, which is reportedly masked Iranian barrels being re-branded and sold. The majority of these cargoes are carried by the “dark fleet”.

VLCC resurgence

It’s clear that the VLCC market has shown resilience and adapted to an ever-changing trading environment throughout 2023. The above-average increases in cargo counts and vessel demand reflect an oil market that has now recovered from the Covid crash, with demand back to pre-pandemic levels. While we may not see the same level of expansion in 2024, we can look forward to a year with a solid foundation in terms of VLCC cargo volume coupled with near-zero fleet growth. This means that any growth in cargo demand will see the tonnage supply/demand balance tighten and the freight market improve accordingly.

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