VLCC freight rates for hauling crude on the key Persian Gulf to China route jumped sharply to hit a two-month high due to surging demand for shipping Atlantic barrels over long haul voyages, market sources said in the week ending Nov. 10.
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Register NowThe the shift in trade flow patterns along with OPEC's production supply cuts -- prevailing for a while now -- has seen Asian refiners embrace long distance barrels, which is frequently putting pressure on the supply of ships in the Persian Gulf.
The recent pull of ships into the Atlantic region saw PG-China 270kt freight rate nearly double from w36 to w71 between Oct. 6 and Nov.6, according to S&P Commodity Insights data.
"Behind the spike is a combination of factors, including owners wanting to secure long voyages from the West as winter approaches, healthy volumes in the Atlantic, the need for Persian Gulf rates to catch up with Atlantic rates, and the typical Q4 strength in the market," a VLCC owner said.
The crude supplies from Atlantic region moved on the VLCCs, especially from the US and Brazil, touching 3.3 million b/d for October loading, marking a significant 37.5% increase compared to the 2.4 million b/d observed in 2022, as reported by S&P Global Commodities at Sea data.
The jump in tonnage demand out of the Western basin has enthused owners to explore long-haul routes from West to East at higher Time Charter Equivalents (TCE) or daily earnings. This has intensified competition among owners in the near term for West-loading cargoes, market sources said.
"It makes more sense for owners to go West. And the ton-mile demand is increasing due to that. Owners are making good earnings on the triangulation route, [which is performing a PG-West voyage followed by West to East trip]," a VLCC broker said.
Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles.
Frequent westward ballasting
Many attribute the strength in the VLCC freight market to the trade pattern change caused by the Russia-Ukraine war, which disrupted European crude oil supplies, forcing it to seek alternatives from the US Gulf Coast and West Africa.
According to CAS, the volume of US and West African barrels moved into Europe stood at 3.16 million b/d from January to October, compared with 2.76 barrels for each month in 2022. The surge in this trade has further strained the availability of VLCCs globally.
A second VLCC owner echoed the view and said that the spike in VLCC rates originated from the increased cargoes coming from the US Gulf on Aframaxes and Suezmaxes. This increased demand made it extremely expensive to transport crude oil on smaller ships, leading to some cargoes being shifted to VLCCs. The trend began in the US Gulf and then spread to other regions like West Africa, Brazil, and the Arabian Gulf, creating a ripple effect.
"The recent rate spikes were not due to usual factors like demand for crude or the current [Middle East tensions], but more due to changing trade pattern caused by the Russia-Ukraine war," a VLCC broker said.
"As certain areas of the world faced tonnage imbalances, it led to sudden spikes in rates. It was a consequence of ships ballasting more frequently, making it difficult to predict when and where there would be a shortage of VLCCs," the source added.