High utilization driving VLCC rate volatility

According to argus Longer voyages and limited vessel availability have increased volatility this year in very large crude carrier (VLCC) chartering costs.

Daily time-charter equivalent (TCE) earnings for the vessels, which carry around 2 million barrel oil, mostly on routes to China, have fluctuated considerably this year because of stretched supply.

More vessels on long-haul voyages from the Atlantic to east Asia has increased the time VLCCs have spent carrying oil this year and limited the availability of the vessels, meaning small regional changes in vessel supply have had outsized effects on freight levels.

The number of laden vessels has stayed considerably above the number of vessels in ballast, while TCE earnings on the key Bonny to Ningbo route for a scrubber-fitted VLCC have fluctuated by as much as US$80,000/day.

VLCCs loaded more crude west of the Suez Canal in April this year than at any time since January 2021, according to data from Vortexa. Voyages from Bonny in Nigeria to Ningbo, China are around 34 days, as compared to less than 20 days for Ras Tanura in Saudi Arabia to Ningbo, meaning more vessels were occupied for longer, reducing availability. Voyages from the US Gulf or Brazil to China take around 53 and 38 days, respectively.

Interest from Asian buyers in Atlantic basin cargoes increased because of favourable pricing and Saudi production cuts hitting demand for ships in the Mideast Gulf.

The availability of VLCCs has also been impacted by changes in trade flows stemming from the Russia-Ukraine conflict. More VLCCs are occupied on Atlantic voyages because of increased flows of US Gulf, Brazilian and West African oil to Europe to replace sanctioned Russian grades.

Historically these trades were mostly done by smaller Suezmax vessels. Some VLCCs going into the so-called dark fleet involved in transporting Russian oil has also probably meant fewer VLCCs for mainstream trades. Switching between Russian and non-Russian can also contribute to volatility in freight levels as the apparent supply of vessels can change quickly.

Despite a recent downward trend, VLCC earnings are likely to stay high and volatile with the Saudi cuts extended into August and very few new VLCCs joining the global fleet.

Six new VLCCs are on order for delivery this year, three are on order for 2025, 10 for 2026, and just two for 2027, according to data from shipbroker Braemar.

Higher newbuilding prices, full shipyards and uncertainty over future fuels and environmental regulations has kept new tanker orders low, although higher earnings are beginning to encourage a rise in ordering.