The VLCC rate rise seen since the start of March could soon come to an end, a leading consultancy has warned.
VLCC rates and TCE revenues have been elevated to levels that owners perhaps thought had been consigned to history.
In the market of elevated bunker prices, oversupply of tankers and declining Iranian export volumes, the steady increase seemed to have caught some market participants by surprise, McQuilling Services said in its latest report.
Although there are factors that should provide a floor to rates, some circumstances that have been supporting rates are likely to gradually vanish in the coming weeks.
For example, in the Middle East, the inauguration of the single point mooring (SPM) facility at Iraq’s southern port of Basra recently experienced several technical issues. This resulted in some 20 vessels waiting to load cargoes, for as long as 25 days.
However, reports have indicated that these issues have now been resolved, resulting in the dissipation of the backlog, as the vessels re-enter the spot market.
Further support for liftings out of Iraq is augmented by recently published data from Iraq’s State Oil Marketing Organisation. Data from March showed that exports hit 2.32 mill barrels per day, the highest level seen since 2003.
However, optimism could be tempered from early April reports of a pipeline explosion in Northern Iraq that carries 500,000 barrels per day of crude to Ceyhan, Turkey, slashing export volumes. This will have a greater impact on the Aframax market while highlighting the potential for instability in that country.
Other loading delays in the Middle East stemmed from drier than usual conditions combined with windstorms. Reports have also surfaced that a lack of ullage is prohibiting some tankers with cargoes of Arab Heavy from discharging in the US Gulf.
These short-term effects have supported the market but should now gradually disappear, McQuilling said.
The widespread adoption of slow steaming is also reducing available vessel capacity. Previously, this method of cost savings was not employed by all owners and some charterers kept the speed requirements in charter parties at the same level as in previous years.
However, the steady rise of bunker prices and tight market conditions means that charterers may be required to pay a premium for any optional speed increases.
The slower speeds prevalent in today’s market results in an additional supply capacity, which can be quickly reactivated by raising sailing speeds. If the high freight rates persist this situation could materialise, McQuilling warned.
The tightening sanctions against Iran have resulted in ships being sent further afield for loadings, especially for discharge in India and China. These loading areas are primarily in the Americas, Caribbean and West Africa.
During the first three months of 2012, loadings from these regions have increased almost 10%, according to McQuilling’s proprietary data. Western sanctions have also removed almost all of the 25 VLCCs operated by NITC.
Some 300,000 barrels per day of Iranian crude oil exports is being taken out of the market and the vessels are believed to be currently employed for floating storage.
In response to security of supply issues, the importance of maintaining strategic petroleum reserves (SPR) is of utmost importance to governments - China included.
The EIA has forecast that China has some 79 mill barrels of SPR to fill in 2012, which is equivalent to about 220,000 barrels per day, or one VLCC every nine days.
The decision to purchase barrels for SPR is influenced by several factors, but one can reasonably assume some vessel capacity is being absorbed, McQuilling said.
Tanker pools and owners of large fleets are also having a significant effect on rising rates. This category includes seven tanker owners and fleet pools that control about 180 vessels.
After dismal 2011 earnings, these operators are closely monitoring returns and not simply accepting rates that cover operating expenses. In an effort to push rates higher these owners are allocating their assets to counterparties that pay a premium.
Looking ahead, if Iran resists the pressure to dissolve their nuclear programme, further disruptions to oil supplies will occur. This sourcing of new supplies should benefit tanker owners, as vessels will be employed on longer haul routes.
Rates out of the AG could experience a boost, as some vessels would likely ballast out of the region.
However, the delivery schedule from previous years’ orderbooks hangs over these positive developments like a dark cloud, the consultancy warned.
Through the end of March, 11 VLCCs were delivered from shipyards, which compared to McQuilling’s year-to-date expectation of 16, had limited the pressure on the market and helped boost rates.
However, with the possibility of 62 VLCCs entering the market this year, there is still plenty of concern regarding vessel supply.
Owners of older tankers (1993-1997) will continue to feel the pressure of terminal and charter requirements, which could raise the exit profile.
"Based on these factors, we do not forecast a massive improvement in rates in the coming weeks and believe the market cycle has yet to make an upward turn," McQuilling concluded.