Mette Frederiksen

In an unexpectedly lenient move, the US announced last week that sanctions against companies trading in Venezuelan oil will be dropped. This provides an opportunity for a reshuffling of oil movements, particularly in the Atlantic basin, and with that comes a renewed focus on VLCC employment and impacts on the ‘dark fleet’.

As its sanctions are removed, Venezuela can produce and export its oil freely. Discounts on the price of its crude will likely disappear, turning a significant amount of oil away from the dark trade and into mainstream markets. The sanctions are not lifted indefinitely, however. There is currently a time limit of six months in place on the sanctions relief to ensure that the Venezuelan government lives up to its end of the bargain to allow free and fair elections next year.

The oil sector in Venezuela has been heavily impacted by the sanctions, which have been in place since 2019. Oil production has dropped from highs of 2.5 million barrels per day to current levels of around just 800,000 barrels per day. The sector has suffered from years of under-investment and mismanagement, and any production ramp-up is unlikely to be quick. Forecasting agencies anticipate a limited recovery in oil production, but most agree that we will see a significant change to the flows from Venezuela.

We have seen around 400,000 barrels per day of seaborne crude and condensate flows from Venezuela this year. Just over half of these barrels are lifted on VLCCs, albeit with a portion of this marked as estimated liftings, as much of this happens on dark or grey vessels that are not all trackable via AIS. The Tankers International fixture data counts 5-6 liftings from Venezuela per month this year, most performed on dark fleet vessels with an average age of 18.3 years. Much of the sanctioned crude has been going to China, where teapot refineries have benefitted from the price-discounted supply. The recent easing of the sanctions has seen some supply head to the US and a small amount go to Spain.

As full sanctions relief is implemented, more Venezuelan crude is expected to flow to the US and Europe, with many US refineries built specifically to run on Venezuelan molecules. This could replace current US imports from the Middle East. However, the volume on that trade has not been substantial to the tonne-mile equation through 2023, and the VLCC segment accounts for roughly 3 liftings per month. The increased flow of crude from Venezuela to the US and Europe will boost demand for the Suezmax and Aframax segments.

A more significant impact on the VLCC market will come from current Venezuelan crude receivers having to find alternative supplies. Smaller Chinese independent refineries will lose access to cheap Venezuelan oil and may attempt to increase purchases of discounted Iranian and Russian barrels. As this is already a saturated market, supplies from Brazil and Colombia will likely satisfy any shortfall. This is a positive side effect, as the trade route from Brazil to China is predominantly a VLCC route.

A further implication will be that the trade route reshuffle will mean a return to the mainstream tanker fleet to lift the crude. The US and Europe will not welcome dark fleet vessels, and the same is the case for any additional VLCC loadings in Colombia and Brazil. A VLCC roundtrip from Brazil to China takes around 95 days to complete, so each additional monthly lifting on this route would employ 3 VLCCs full time. This means that if the current 5-6 monthly cargoes from Venezuela to China shift to load on mainstream VLCCs from Brazil, it will add demand for 15-18 mainstream vessels. This shows the potential scale of the impact of moving these oil flows into the conventional tanker market.

As Venezuelan sanctions are lifted for the first time in nearly 5 years, the market will be impacted in new and multiple ways. To stay informed on the latest market insight and data, download our app here: https://app.tankersinternational.com/

The Atlantic basin is providing massive support for the VLCC tanker market. Growing supply from the region means long tonne-miles across the Atlantic as much of the oil is being shipped to the Far East. In the Far East, we continue to see demand from China ramping up after COVID lockdowns. While the market’s expectations for China were perhaps too optimistic to begin with, we are still seeing signs of recovery, and oil demand remains healthy and likely to improve progressively. Furthermore, despite weaker economic data and somewhat depressed market sentiment in recent weeks, major reporting agencies have not made significant downward revisions to oil demand forecasts yet.

Low vessel supply growth is adding to the good news for shipowners. Despite an ageing fleet, shipowners remain reluctant to place newbuild orders, with not a single VLCC to be delivered in 2024 and only one ship in 2025 and one in 2026.

This shortage in newbuilds is allowing market fundamentals to rebalance after the massive drop in demand of the COVID years. Even the production cuts announced by OPEC+ nations such as Saudi Arabia have not dampened the mood. Rather, the capped volumes are expected to be filled by producers such as Brazil, resulting in more long tonne-miles for VLCCs across the Atlantic to Asia. The Chinese market is huge and is one of the key drivers of the VLCC market, and the resumption of trade there is countering other market concerns.

Historically in the freight market, we have seen VLCC rates putting pressure on Suezmax rates, which have then put pressure on Aframax rates. However, since the invasion of Ukraine, this trend has largely reversed. Aframax and Suezmax rates spiked initially when some owners took the risk of shipping Russian crude. As freight levels in the smaller tanker segments rose to historical highs, the VLCC segment became competitive in markets that it has not traditionally traded in, such as West Africa and US Gulf to European destinations. This has given VLCC owners optionality. They can choose to keep their vessels local in the West or trade them longer-haul on the traditional routes to Asia, depending on their views on the freight market.

The VLCC market has been seasonal in the past, with high rates in winter and lower rates in summer. However, this pattern has weakened over the last few years, and this year in particular, we are experiencing sound second-quarter results that have kept the market buoyant amidst the borderline recession in some parts of the world and the lingering macro-economic effects of the pandemic.

In 2023, Brazil introduced a new freight tax, which caused oil exports to drop dramatically. Oil companies reduced or halted their VLCC export programmes rather than paying the additional costs. This decision appears to have coincided with an increase in West African VLCC fixtures to meet part of the demand, particularly from China, with West African fixtures in June increasing by at least 50% month-on-month.

The demand for high oil volumes from Africa over long tonne-miles to China has been good news for VLCCs. The oil export tax in Brazil is due to end in July, and the Brazilian market is likely to resume, and while this may remove some VLCC trade from West Africa, it is still long tonne-miles for VLCCs.

The prominence of the Atlantic basin trade for VLCCs is therefore set to continue to keep shipowners smiling well into the next quarter.

Source: Tankers International

It’s clear that trading patterns for VLCCs have changed significantly over the last 12 months. European oil markets have seen a clear shift away from Russian crude since the start of the Russia-Ukraine conflict.

Official sanctions by the EU on Russian crude in place today mean that we now see virtually no Russian crude flowing into Europe and other Western economies. In June 2022, the EU Council adopted a sixth package of sanctions that, amongst others, prohibited the purchase, import or transfer of seaborne crude oil and certain petroleum products from Russia into the EU. The restrictions applied from 5 December 2022 for crude oil and from 5 February 2023 for refined petroleum products.

Europe has therefore had to find alternative crude supplies from other sources. We have seen Europe increase its imports from the Middle East, as well as Atlantic based oil suppliers including West Africa, the US and South America.

Smaller tankers have traditionally serviced the routes from these Atlantic basin suppliers to Europe, but in 2022 we saw a marked increase in the use of VLCCs. There were 28 VLCC loadings destined for Europe in August alone. This compares to just 1-4 monthly liftings prior to restrictions on Russian barrels.

Several market factors have aided this development. Firstly, we have simply seen more seaborne oil imports into Europe as Russia’s pipeline network and short haul shuttle shipments were no longer an option.

While the smaller tanker segments – Suezmax and Aframax – saw freight rate spikes in the immediate aftermath of the war breaking out, the VLCC segment had no direct links to Russia, so the freight environment for this group of ships remained flat and relatively low. This relatively weak VLCC freight market allowed VLCCs to compete with the smaller segments on the inter-Atlantic routes that in the past they had zero involvement in.

From the second quarter of 2022 onwards, we saw a sharp rise in inter-Atlantic VLCC liftings, and this elevated level of activity has persisted since. Our proprietary fixture app data does show a short-lived dip in VLCC activity in September and October last year. This was partly due to a drop in crude flows into Europe, according to data from Kpler. This was also the time when the VLCC freight market began its strong recovery, and we saw a proportional increase in the use of smaller tankers compared to the record month of August for the VLCC segment.

Since then, it appears that the inter-Atlantic trade routes have found a new balance and that they are here to stay. The use of VLCC tonnage has increased to 21-23 liftings per month over the last four months.

This trend is a positive development for shipowners. It allows vessel owners to keep their ships in short-haul business in a relatively high market and to be able to load another cargo while freight is high. This can be more lucrative than locking the vessel in on a long-haul trade and risking that the market may have fallen by the time of the next load.

This dynamic creates more volatility in the market with uncertainties around discharge times and with more frequent port operations that shorter voyages inherently carry. The result is the port to sailing time ratio goes up. This new dynamic also allows for increasingly creative trade combinations, and by triangulating a vessel, a shipowner can maximise their earnings compared to a standard Middle East to China trade route, which carries an equal amount of laden to ballast days.

On 25 February 2023 the EU adopted its 10th package of sanctions against Russia and is expected to announce more new sanctions in the coming weeks. We continue to monitor the situation, but we expect the current VLCC market conditions to persist throughout 2023, and beyond.

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.