Mette Frederiksen

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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2023 will be remembered for many reasons. For the tanker market, it was the year that VLCC freight finally remained within positive territory for a full 12 months. But it wasn’t a smooth ride. The market had increased volatility, and earnings swung dramatically, from barely covering operating expenses to highs of $100,000 per day.

The story of the VLCC tonnage profile remains optimistic, especially when considering the limited size of the orderbook. In 2023, the global VLCC fleet took delivery of 22 new vessels, a record low number in its own right, but what is truly remarkable is that only a single VLCC is scheduled for delivery in 2024. Owners have been, and still are, reluctant to lock in new orders. This is understandable, given the prevailing record-high newbuilding prices and the uncertainty surrounding future emissions and fuel requirements. Even the most cynical observer would have to predict a bullish trend for VLCCs for the next couple of years.

Looking back, many of the same factors that drove 2022’s tanker market trends remained relevant in 2023, including Russian oil displacement to Far Eastern markets, the OPEC+ alliance curbing global oil supplies and a “dark fleet” of often older tonnage continuing active trading, when in the past they would have exited the market years sooner.

The dark fleet and sanctions

While the conflict in Gaza is causing regional disruption, the ongoing war in Ukraine is still one of the most significant factors impacting the maritime sector. Russia’s actions and subsequent sanctions redirected the country’s crude to eastern buyers, reshaping trade patterns for the VLCC segment. Europe, pushed to seek oil supplies elsewhere, turned to the US, West Africa, and the Middle East, altering tradelanes and boosting VLCC competitiveness in the Atlantic basin. With no sign of a resolution to the conflict, these newly evolved trade routes are here to stay for the foreseeable future.

The so-called “dark fleet” provokes mixed emotions. The reason for the lack of vessels exiting the trading fleet can be attributed, almost entirely, to these vessels. Given the large amount of sanctioned oil utilising this fleet at lucrative freight rates, it is easy to understand why some owners are taking this risk, especially on ships that would otherwise be certified scrap candidates. While the dark fleet does draw tonnage away from the mainstream trading fleet, many of the vessels are old and the ownership structure is unclear, which poses big questions about maintenance, safety and regulatory compliance. To change this situation, authorities would need to intensify their commitment to enforcing sanctions. Recently, Western governments have been taking action by sending letters to individuals engaged in sanctioned trades, while the European Union’s latest round of places is requiring owners in the bloc to report any vessels sold to Russian entities, for use in Russian trade, and groups that may seek to avoid the G7 oil price cap. These developments do suggest the start of a more substantial effort to enforcement as we approach 2024.

At the other end of the scale, a country that has had its sanctions eased in 2023 is Venezuela. We now see Venezuelan cargoes lifted on mainstream VLCCs, which displaces the need for dark vessels. At the end of 2023, these cargoes are currently being lifted at a premium to US Gulf cargoes. We should keep in mind that sanctions have been eased with certain conditions in place, and any untoward actions by the Venezuelan government could see restrictions reimposed. The current tensions between Venezuela and neighbouring Guyana could impact the status quo, should they escalate.

Oil and the pull from the Far East

In oil markets, the OPEC+ alliance agreed at its latest meeting to making additional voluntary production cuts in the first quarter of 2024. While there is some uncertainty around the real size of the cut and headline numbers talk of 2.2 million barrels removed from the market, the reality is that 1.3 million barrels were already off the market stemming from Saudi Arabia and Russia’s voluntary cuts already in place. The voluntary nature of these cuts, combined with recent disagreement between some member states, puts a question mark over adherence. We have also seen in the past how member states react when OPEC+ does not align with its strategic objectives, such as Saudi Arabia’s actions in 2020 and recent announcements from Angola to reject any further production cut.

On the flip side, we observe a surge in oil production from non-OPEC producers, including an additional 1 million barrels a day from Atlantic basin producers expected in 2024. Brazil is now aligning themselves with OPEC+, and this adds a downside to current production outlooks. But this does not change the fact that the tonnemile effect from increased Atlantic Basin supply most likely heading to demand centres in the Far East helps to more than offset the potential loss in vessel demand driven by the OPEC+ curbs.

Another market driver that we must highlight is China. Whilst it is difficult to ignore the noises of a bleaker economic outlook, oil demand continues to grow, nonetheless, and monthly crude imports reached new records in 2023. The country’s economy is transitioning away from being based on manufacturing and construction. Instead, China is expanding its petrochemical capacity, aiming for greater self-sufficiency in feedstocks such as LPG, ethane, and naphtha, which now drive demand more than the traditional gasoline, jet, diesel, and gasoil. China’s oil demand is set to continue to expand in 2024 and the country is the main contributor to global growth next year.

Finally, we always need to factor in the bigger picture: the global economy. So, whilst VLCC fundamentals and the wider tanker markets look bullish, the macroeconomic picture is far less certain. Beyond geopolitical conflicts, the hot topics remain energy prices, inflation, and national debt. Most importantly for the shipping markets, a lot of nations continue to teeter on the edge of recession. Historically, the impact of a recession on oil demand varies widely from one crisis to another, with the Covid years being the worst in recent memory. Nobody knows the exact impact of a potential global recession, but it appears that the VLCC market is reasonably well-equipped to deal with one.

As we look ahead to 2024, the tanker markets are lined up with strong fundamentals. Demand continues to grow, even if at slightly more muted rates, but there is a geographical mismatch between oil demand and supply growth. This will continue to drive tonnemiles and therefore VLCC demand up. We expect much of the same as we have seen this year, with a strong upside potential supported by zero to negative supply growth.