As Saudi Arabia and Russia began an all-out oil price war for market share, the shipping industry is going through a supertanker run and charter rates for very large crude carriers (VLCCs) are going through the roof.
The Saudi promise to flood the market with oil and the price collapse it triggered have had traders scrambling to book VLCCs, each capable of transporting up to 2 million barrels of oil.
One reason for the high supertanker demand was Saudi Arabia’s increased bookings of tankers, on top of its own fleet, to transport extra 2.6 million bpd of its now super-cheap oil to all regions, as it aims to punish Russia by squeezing it out of key markets for refusing to back deeper production cuts. The United Arab Emirates (UAE) has promised another 1 million bpd of supply to the market next month, as former allies OPEC and Russia are now locked in a battle for market share.
The shipping market feels that there will be a supertanker supply crunch in the coming oil supply deluge, and VLCC rates are skyrocketing.
The other reason for sky-high tanker rates is that traders and the trading arms of oil majors are looking to charter tankers for floating storage as the oil market structure has flipped to contango. This is the market situation in which front-month prices are lower than prices in future months, pointing to a crude oil oversupply and making storing oil for future sales profitable.
In just a week – and what a week it was with oil prices plunging 25 percent for the worst weekly drop since 2008 – charter rates for supertankers jumped tenfold, brokers and traders tell The Wall Street Journal’s Costas Paris. Related: Saudi Arabia’s Oil War Could Bankrupt The Kingdom
Just before the OPEC+ break-up on March 6, daily rates for VLCCs were in the low $30,000s. At the end of last week, the cost to charter a supertanker had surged to $200,000-$300,000 a day, depending on the destination of the crude oil cargo, brokers told The Journal.
In the United States, most of the demand for supertankers and smaller tankers is generated by market participants looking to capitalize on the contango structure.
“In our neck of the woods, much of the call on available VLCCs from fleets happen to be down to contango plays,” a source told Forbes’ Senior Contributor Gaurav Sharma.
Despite the current strong demand for supertankers and daily charter rates surging daily, analysts don’t believe that these high rates will be sustainable for long.
The coronavirus pandemic is dampening oil demand everywhere, and such high rates may already be unsustainable.
“In this weak demand environment, we are very close to levels where the current freight rates become unsustainable, if they aren’t already,” a shipbroker told Reuters on Thursday.
The last time a sudden price spike sent supertanker rates soaring was in late September when the U.S. slapped sanctions on some Chinese tanker owners for knowingly shipping oil from Iran. In late January 2020, the U.S. partially lifted those sanctions, which, combined with the coronavirus-inflicted demand slump, led to the lowest tanker rates in months in early February. Related: Largest Oil Glut In History Could Force Crude Prices Even Lower
The current rush for supertankers and the subsequent price spike may not last long, especially if the provisional bookings don’t materialize in actual contracts, analysts and shipbrokers say.
Some buyers may find the charter rates too steep.
Unipec, the trading unit of Asia’s largest refiner, Chinese Sinopec, is said to be attempting to defer or cancel the loading of at least four supertankers from the Middle East in April due to higher freight rates and an expected reduction in processing rates, sources familiar with Unipec’s plans told Bloomberg on Friday.
The current market for chartering tankers looks like early October last year when the sanctions on Chinese tankers eliminated a part of the fleet from the market, a broker in Singapore told the WSJ.
“If it turns out that more VLCCs will need be chartered over a sustained period, then it will be Christmas every day for owners. But this bubble will eventually pop when logic returns to the big oil exporters,” the broker told The Journal.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More