Wednesday, August 24, 2016

VLCC cargoes from the US could be on the rise

China VLCC ordering 10 VLCCs

In a clear indication of the current lackluster picture of the VLCC freight market, cargoes booked from the US, not the most commercially inticing, could soon be on the rise. In a recent note, shipbroker Alibra Shipping noted that “VLCCs fixed to carry crude from the US are few and far between – not least because the government only permitted the commercial export of American crude in December. Then, of course, there’s the US’s lack of load ports able to handle VLCCs. Nevertheless, this year has seen a regular sort of trade developing, with a VLCC from the VL8 Pool fixed in the spot market around once every two months for the US Gulf to Singapore run. Interestingly, this month alone has seen two such VLCC fixtures! This past week, Gener8 Maritime’s VLCC GenMar Zeus (318,300 dwt, built 2010) has been reported fixed on subs in the spot market for a voyage from the US Gulf to Singapore for ST Shipping, laycan Sept 8-10. The rate was not reported. On August 9, Navios Maritime Acquisition’s Nave Electron (305,200 dwt, built 2002) was reported fully fixed to ST Shipping for a voyage from the US Gulf to Singapore for a lump sum rate of $2.75m, laycan August 27-31. Previous to these fixtures, the last time any VLCC was fixed ex-US Gulf was IN June for ST Shipping (again), which fixed Gener8 Success (320,000 dwt, built 2010) for a voyage to Singapore, loading July 25-30. The lump sum was reportedly $3.75m”, said Alibra.

According to Alibra, “cheap freight rates and a generally weak VLCC market are a big factor in these notable fixtures from the US. The lump sum paid for Nave Electron this month pales in comparison to a failed deal reported in early March, for which $4.85m had been mooted for the US Gulf-Singapore voyage. VLCC voyages from West Africa haven’t been quite as numerous as they have been in previous months, so it looks as though the US is stepping into the breach – especially while the arbitrage with Brent stays open. Consultancy firm Energy Aspects expects exports of US crude to increase in coming weeks, as outages in West Africa squeeze supply and props up demand. Over 10m bbl of oil is rumoured to be “leaving the US over the course of the next month or so – most of which is pointed towards the Med and Northwest Europe,” according to research by Energy Aspects. Two Suezmaxes have been reported fixed this week for a US Gulf-UK/Med trip. The price differential between Brent and WTI crude has also widened this week, and traders are seizing arbitrage opportunities. WTI is currently trading at $48.21/bbl, while Brent is trading 5.45% higher at $50.81/bbl. On Tuesday, the differential was as wide as $2.50/bbl over US crude futures, the most since late February”, the shipbroker concluded.

Meanwhile, in the VLCC market this week, shipbroker Charles R. Weber said that “the Middle East VLCC market observed modest gains this week with the AG‐CHINA route adding 7.5 points through Wednesday to a high of ws42.5 before paring back gains late in the week to conclude at ws40. The gains came despite a slowing of demand; the week observed 20 Middle East fixtures, representing a 29% w/w decline. Elsewhere, the West Africa market was also slower, with a 33% w/w decline to four fixtures. In isolation, the South America/Caribbean/USG market was markedly more active with fixtures jumping to nine from just two last week. The activity there, however, came after CBS‐SPORE rates posted fresh losses, dropping $200k to a seven‐year low of just $2.60m on a widening regional supply/demand imbalance with participants noting last week’s US‐bound fixture tally at an 11‐month high”.

CR Weber added that “despite the widely‐noted ton‐miles generated by stronger recent AG‐USG demand (which has jumped 35% y/y as US crude production declines and liberalized exports have narrowed differentials between US and international crude grades), ton‐miles have remained pressurized by losses from the West Africa market. That region has seen voyages to points in the East drop 12% y/y. Neither development is productive for rate and earnings development, in our view, against the new paradigm of VLCC supply/demand fundamentals which have prevailed in recent years. The market today is heavily driven by the geographic distribution of voyage origination – with the West Africa market competing for the same Asian return ballasters as the Middle East and AG‐USG voyages trading, largely, on the basis of triangulated economics rather than the implied round‐trip TCE of agreed rates. During 2015, the geographic distribution continued widening while the number of AG‐USG voyages were balanced (or often below) those for onward trades from Americas to the Asia. As the number of USG arrivals has now exceeded demand for onward regional voyages, we have observed units ballasting to West Africa, where demand has been hit by forces majeures and compounding reduced West Africa draws on Middle East positions, creating higher availability there. Evidencing this, we note that YTD ton‐mile demand generation is off by just 1.1%, fleet growth has clocked in at 7% since the start of 2015 but earnings are off by 22% YTD y/y (with August poised to observe a 46% y/y earnings decline. As we have noted in the past, ton‐miles adjusted to account for geographical distribution of voyage origination are a better way of analyzing the market’s demand position and our proprietary model shows that on this basis demand declined by 9% y/y during Q2 (the adjusted demand figure was 14% greater than traditional ton‐miles, which compares with adjusted ton‐miles during 2Q15 standing 19% above traditional ton‐miles). During 2013, adjusted ton‐ miles were actually below traditional ton‐miles, largely due to the efficiency of triangulated trades which represented a larger portion of the overall market”.

The shipbroker remained optimistic that Nigeria’s security situation owe to teething problems associated with the start of President Buhari’s term in 2015 (which ended eleven years of executive control by the country’s PDP party) and as such will resolve in the coming months given the urgency of resolution (at least sufficiently to strongly reduce the volume of exports under force majeure). Though VLCC loadings in the region are more heavily associated with Angolan cargoes, the impact of Nigeria’s output losses have reduced interest in West African grades by boosting their price against Brent and Dubai benchmarks.

According to CR Weber, “in the near‐term, some supportive prospects are evident in the September Basrah program, which shows a 9% m/m increase in VLCC cargoes (once likely co‐loads are accounted for) with the bulk of cargoes centered on the month’s final decade. Additionally, recent comments by Saudi Arabia’s oil minister pointing to strong demand for Saudi crude and JODI data showing record production during July of 10.67 Mnb/d imply a likely sustaining of export strength through at least the near‐ term. Corresponding rate strength could materialize once charterers progress into October dates when the stronger end‐September program – and the potential for strong draws to service West Africa cargoes to simultaneously rise – could yield a tighter supply/demand position that that which presently prevails. Twenty September fixtures have been covered to date, leaving a further 23 likely uncovered for loading through September 10th. Against this, there are 40 units available for loading during the same space of time, implying a surplus of 15 units, which compares with 20 surplus units observed at the close of the of the August program”, the shipbroker concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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