OPEC+ has announced a decision to extend its voluntary production cuts by another month. This means that the 2.2 million barrels per day of additional supply, will now be phased in starting from January 2025. This gradual increase of approximately 180,000 bpd per month is a positive development for the VLCC market.
Historically, OPEC production, particularly from Middle Eastern producers, has shown a strong correlation with VLCC cargo counts. With OPEC+ withholding supply, the VLCC market has faced considerable pressure, so the upcoming return of this production, which is predominantly from Middle Eastern members of the alliance, is a positive development.
The additional 2.2 million barrels per day, phased in over 12 months, could require an additional 55 VLCCs to transport the increased volume of Middle Eastern crude if it all heads to destinations east of Suez. This is a significant boost for the VLCC market outlook for 2025.
The past couple of years have seen a notable uptick in drydocking activity for older tankers. This trend coincides with the well-documented growth of the shadow fleet, raising questions about safety and environmental compliance. Our proprietary data indicates that in 2023 more than 40 VLCCs aged 18 years and older went through a drydock.
Traditionally, older vessels nearing the end of their operational life would be scrapped for parts or metal. However, the emergence of the shadow fleet, a collection of older tankers operating outside of traditional regulations and oversight, appears to be altering this dynamic.
The increased profitability of operating older tankers, particularly for transporting sanctioned cargoes outside the mainstream tanker market, is incentivising owners to invest in drydocking vessels. The high cost of a drydock is often seen as a precursor to scrapping, but in the current climate, it seems that some owners are opting to extend the life of their assets and capitalise on the shadow market.
This trend presents a unique challenge for the industry. The shadow fleet raises concerns about safety and environmental compliance. Classification societies and regulatory bodies have withdrawn their support for vessels trading in sanctioned trades, as has the insurance community. This means less oversight on maintenance and assurance that minimum operating standards are met.
Part of the trend could, of course, also be explained by the highly positive outlook for the mainstream tanker markets in the next couple of years. We, and many other market stakeholder, are confident that a combination of limited fleet growth and explanding tonnemile demand for large crude tankers will support a healthy freight environment in the medium term, leaving owners to want to hold on to tonnage that might historically be divested.
Looking deeper into the data we do find some mainstream owners drydocking older vessels. However, in the time frame covered, we note that 80% of the vessels that went through a drydock aged 18 and older are being traded in the shadow fleet. This would suggest that the drydocking trend of the older fleet is predominantly driven by the rise in the shadow market.
The tension in the Bab-el-Mandep continues to drive tanker owners to utilise the longer route via the Cape of Good Hope to transport oil from the Middle East to Europe.
Our VLCC fixture data shows that the usual preferred route for the VLCC segment is via the Suez Canal, but since December almost all VLCCs have travelled the longer distance via the Cape. This of course adds to vessel demand as the longer distance adds around 15 days to each voyage.
The impact on the VLCC market following Saudi Arabia’s decision to abandon plans to increase production will be minimal in the near term and could bring a boost for VLCCs down the line.
When we look at our Tankers International fixture app data, it is clear that Middle Eastern producers, including Saudi Arabia, continue to provide a strong baseline for the VLCC segment. Despite OPEC+ production curbs through 2023, fixture counts in the Middle East Gulf remain at record levels. If we include the rising volumes of Iranian masked “Malaysian Blend” cargoes lifted in Singapore – averaging 10 liftings per month in 2023 – there is no change in Middle Eastern crude volumes lifted on VLCCs.
Brazil will continue to play an important role in the crude tanker markets in the coming years. The VLCC segment will be the main beneficiary, followed by suezmaxes.
Production in Brazil has been growing fast, and crude exports have been rising, and the VLCC segment’s share of seaborne exports has risen to 64%. Brazilian exports to China increased significantly in 2023, and nearly all of this cargo is carried on VLCCs.
We see this trend reflected in our VLCC fixture data. Looking at VLCC spot cargo liftings in Brazil, we note steady growth throughout the last decade and a sharp rise in 2023, where we count close to 200 liftings. Brazil remains an important driver going into 2024, and initial data points indicate that VLCC volumes are not slowing down.
How long before India becomes the most important driver of global oil demand growth?
As the world continues to navigate through evolving energy landscapes, we see India ascending as a key player in shaping the future of oil and vessel demand. The country’s rapid economic growth, burgeoning population, and ambitious development initiatives pave the way for increased energy consumption.
India’s appetite for energy could create new opportunities and challenges for the global energy sector. Our VLCC fixture data shows growth in activity into India over the last four quarters and the country remains an important destination for our segment, with January counts at 32 fixtures.
We continue to monitor this data closely to be ready for any opportunities that may arise from these developments, because one thing is for sure; there is no sign of a slowdown from a country boasting high GDP growth and a strong focus on industrialisation and urbanisation, that will ultimately drive oil demand growth.
As China stepped out of its Covid bubble in 2023, we saw the country return to record crude import levels and, with that, a new surge in VLCC activity. Our fixture data counts an average of 17.8 additional VLCC cargoes per month into China in 2023 compared to the year prior.
We have seen a shift in the supply picture, where many Middle Eastern suppliers have been cutting production, and this has left the door open for South American and US suppliers to fill the gap. We note an increase of 4.8 monthly cargoes from South America and 3.6 additional cargoes from the US heading to China in 2023. The tonnemile effect of this shift has been hugely beneficial to the VLCC segment.
Another point to note is 5.1 additional cargoes of the so called “Malaysian Blend” which is lifted from Singapore. These are most likely masked Iranian barrels being re-branded before being sold on.
Going into 2024 Chinese growth is expected to slow down. However, crude demand is still set to rise, and with that, the market will continue to build on an already strong foundation of VLCC activity into the country.
