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Why U.S. Supertanker Rates Are Spiking

  • Both supertankers (VLCC’s) and medium sized tankers have seen an increase in rates as a result of risking geopolitical risks premiums.
  • LNG shipping stocks have also performed better than the market thanks to the Ukraine-Russia war increasing demand for seaborne volumes of liquefied natural gas.
  • Shipping rates are likely to remain elevated with demand for American crude in Asia increasing as the region’s crude becomes more expensive.

After sinking to fresh lows in the early part of the year, freight rates for U.S.-loading supertankers have skyrocketed as Asian refiners turn to the U.S. market amid production cuts elsewhere. Average spot rates for older very large crude carriers (VLCCs) climbed to $83,300 per day while rates for newer and more fuel-efficient VLCCs hit $91,000 per day. VLCCs are super-massive tankers that carry 2 million barrels of oil.

Shipping rates tend to rise during periods of heightened demand or geopolitical tensions. Operators demand higher compensation to send their vessels into dangerous waters, and underwriters bump up the cost to insure ships and their cargo against potential threats, increasing war risk premiums. Sanctions on Russia’s energy and maritime shipping sectors have forced crude oil buyers in Europe to purchase their crude oil imports from other markets. 

Medium range tanker rates have also been on the rise, with  clean Medium Range tanker owners shifting to carrying dirty crude in a bid to leverage higher time-charter earnings in the small and midsize sector. Petroleum tankers are generally classified into two groups: clean tankers and dirty tankers. Clean tankers carry lower-sulfur petroleum products, including refined petroleum products such as motor gasoline, diesel fuel, jet fuel, and naphtha. Dirty tankers mostly carry crude oil, but they can also haul high-sulfur petroleum products such as residual fuel oil.

The high tanker rates in the Black Sea are mainly due to higher insurance risk premiums because the sea borders Ukraine and Russia. The Black Sea also borders Georgia, Turkey, Bulgaria, and Romania. HSN says one cause for the high Aframax rates at Russia’s Baltic Sea port, Primorsk, could be higher demand for the smaller Aframax ships on routes traveling from Russian ports to China. Normally, VLCCs are used to transport Russia’s Ural crude oil to China. Related: Church Of England Ditches Big Oil Stocks Over Climate Goals Failure

Not surprisingly, leading commodity shipping stocks have been on a tear: Tsakos Energy Navigation (NYSE: TNP) shares have nearly doubled over the past 12 months despite falling 13% below their 52-week high; Tsakos Energy Navigation (NYSE: TNP)+97.2%, Teekay Tankers (NYSE: TNK)+107.8%; Nordic American Tankers (NYSE: NAT)+79.2%, Frontline (NYSE: FRO)+69.6%, Euronav NV (NYSE: EURN)+33.7%, International Seaways (NYSE: INSW)+98.0%.

LNG shipping stocks have also performed better than the market thanks to the Ukraine-Russia war increasing demand for seaborne volumes of liquefied natural gas (LNG): Cheniere Energy (NYSE:LNG)+13.4%, Flex LNG (NYSE: FLNG)+21.2% and GasLog Partners (NYSE: GLOP)+39.4%.

The same can, however, not be said about their dry bulk carrier peers: Genco Shipping & Trading (NYSE: GNK) down 30.2% over t 12 months while Golden Ocean (NASDAQ:GOGL) has crashed 39.5%.

Last month, Breakwave Advisors, in partnership with ETF Managers Group, launched the first exchange traded fund (ETF) focused on oil tanker shipping costs, the Breakwave Tanker Shipping ETF (NYSEARCA:BWET). BWET offers exposure to the crude oil tanker shipping market through a portfolio of near-dated futures contracts on indices that measure crude shipping costs. BWET is up 35.6% since its launch.

More Action For American Tankers

Shipping rates are likely to remain elevated with demand for American crude in Asia increasing as the region’s crude becomes more expensive. Heavy trading in Dubai oil has lifted its premium to WTI crude to its highest since late March, a development that could make U.S. crude even more competitive in Asia. 

More traders have turned to Dubai after Persian Gulf producers such as Saudi Arabia hiked prices and shipping rates also climbed.

Bloomberg has reported that Dubai swaps were trading at a premium of $3.65 a barrel above U.S. benchmark West Texas Intermediate futures in Singapore on Wednesday, with the spread usually smaller than $3. Increased trading of partials--smaller lots that are accumulated and converted into physical cargoes--is also giving a boost to Dubai oil prices. 

Dubai oil is considered a proxy for other regional grades.

Two South Korean refiners have purchased ~8 million barrels of U.S. oil, including WTI Midland crude, so far this month. Asian exports of U.S. crude have been climbing with buyers returning after months of scooping up cheap Russian barrels.

U.S. crude oil exports for the month of April surpassed forecasts, hitting a record 4.5 million barrels per day in March thanks to a strong Chinese market due to rising fuel demand. U.S. crude exports grew 22% last year from 2021 after Russia's invasion of Ukraine led the U.S., the EU and Canada to ban imports of Russian oil and dramatically altered global flows. 

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China is the world’s second largest oil consumer, and has recorded an economic resurgence ever since it rolled back its strict zero-covid policies. April exports to China surged to ~850,000 barrels per day, the highest level since May 2020..

U.S. crude tends to be quite a bit cheaper than Brent, with the spread currently at $4.52 per barrel.

By Alex Kimani for Oilprice.com

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