Despite signs of improvement in freight rates out of the Persian Gulf, the VLCC market looks headed for an uncertain winter as the larger-than-expected production cut by a coalition of OPEC and other oil producers could spell fewer crude shipments from the Middle East.
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Register NowThe 2 million b/day cut by OPEC+ to shore up crude oil prices, compared to the expectations of about 1 million b/day, is expected to weigh on the VLCC market in the seasonally strong winter months, trading participants told S&P Global Commodity Insights.
The development comes following improvement in crude supply and the corresponding pick up in demand resulting in monthly VLCC shipments from the Persian Gulf rising 26% to 135 loadings in Q3 after averaging 107 liftings during the first half of the year, according to data from Platts cFlow ship and commodity tracking software from S&P Global.
The VLCC market was in a recovery mode after a weak Q1 and Q2, when the average of freight rate on the benchmark Persian Gulf-to-China route was at w38 and w46, respectively. The Q3 freight rate averaged at w72, according to data from S&P Global.
However, some VLCC owners remain positive despite the OPEC+ move. "The market will find its balance from the US SPR release. China's reopening is going to increase its [crude oil] requirement. We are starting to see more ton mile demand," said a VLCC owner.
"Even if the war stops, the trading routes won't change as buyers want to secure energy supply in the long term, which means one thing to owners — increased ton- mile demand. It is a matter of time, things will move," the source added.
Carbon regulation may help
While the supply of cargoes may come under pressure for the VLCCs, one key positive could be the forthcoming emission regulation -- known as Carbon Intensity Indicator -- set for next year, which may result in older tonnage being pulled out of trading, the same source said.
As the market heads into the winter season, some owners are
taking a wait-and-watch approach while others are trying to secure long haul voyages from the US Gulf Coast to offset the impact of the crude production cut, according to a VLCC charterer.
"It [freight rates] could hover in the w80-85 range. A big upward potential is not likely to happen," the chartering source said.
Counting on US exports
Meanwhile, trading participants have expressed reservations on the extent of the fall in crude export volumes for it to impact the freight market.
"Given that most OPEC+ members will be unable to produce at even their lowered quota levels due to capacity constraints, we calculate the actual supply reduction to the market from the 2 million b/d cut to be 780,000 b/d versus October," analysts at S&P Global said in a latest research note.
"...88% of the cuts will come from Saudi Arabia and the UAE, the world's only countries with remaining spare capacity as of October," the report noted.
Some market participants are counting on the US exports to cushion the impact on the VLCC segment from the OPEC+ cut.
"That is not good news for owners. But we need to see how the cargo flow from the US goes. Some said that the US will increase their crude export [which could help counter] OPEC cut," a VLCC broker said.
Also, the global economic slowdown could dampen any hopes of sustained freight recovery in the VLCC sector, said market participants.