VLCC owners have had a good run this year, with average spot earnings on the benchmark trade from the Middle East to Japan at $24,500/day (mid-November), the highest level since 2010.
A number of factors have supported stronger VLCC returns, Gibson Research said in a report.
For example, Middle East OPEC crude production has averaged record levels since the beginning of the year. At the same time, there have been gains in the long haul trades from South America/Caribbean and West Africa to the East.
In addition, at times, VLCCs have been helped by Suezmax volatility and finally, while there have been positive demand developments, the fleet has remained virtually flat, Gibson said.
Owners were bullish for the remainder of 2014, as rates tended to firm in the run up to the holiday period on the back of typical winter related delays/disruptions and the market ‘psychology’ to fix ahead of the festive period.
Next year, there are more reasons for VLCC owners’ to be optimistic. New VLCC deliveries are anticipated to reach the lowest level since 2006, with just 20 units scheduled to enter service.
We should also continue to see further increases in the long haul trade from the Atlantic Basin to the Asia/Pacific region on the back of continued growth in US crude production and rebounding Libyan output. This will free up more Latin American and West African barrels for shipments further afield, Gibson said.
However, there are clouds gathering on the horizon. Two refineries in the Middle East, with a combined capacity of 0.8 mill barrels per day, are expected to reach full-scale operations in 2015.
Their impact on VLCC demand will be negative, as these refineries will draw a significant amount of regional supply away from international crude exports out of the MEG.
A lot will also depend on whether OPEC decides to maintain, or to cut its crude production at its next meeting at the end of this month. There is a great deal to consider - slowing growth in global oil demand, booming US crude oil production, OPEC’s market share, recovering Libyan output, a growing surplus of crude and falling oil prices, Gibson said.
If OPEC decides in favour of output cuts, these are likely to come from the Middle East, considering the budget restraints of African and Latin American producers. If that is the case, then this will push crude tanker demand from the MEG to even lower levels.
However, if OPEC decides against cutting production in order to protect its market share, this could be positive news for owners in terms of tanker demand.
In addition, unless we see stronger than expected growth in oil consumption, OPEC’s decision to maintain crude production at similar levels to those seen earlier this year, could potentially translate into a much bigger surplus of crude oil in the market.
This crude will have to be stored somewhere. From our point of view, the big question is whether it could be stored in tankers, Gibson concluded.