VLCCs are affected more than any tanker type with the fluctuating bunker prices, due to the large tankers spending more time at sea and consuming more fuel oil.
Although the current lower bunker prices have the potential to boost earnings significantly for the owner, spot Worldscale rates are falling even faster and so TCE earnings have dropped sharply in recent weeks, Gibson Research said in its weekly report.
Bunker prices have been steadily falling since February of this year, but more dramatically in the past month, with the downwards pressure on oil prices. Since the start of March 2012, the average weekly price of 380 Cst fuel oil in Fujairah has decreased by $129 per tonne (down 17%), reaching an average $617 per tonne last week.
Oil prices are also down and Brent is at its lowest since January 2011, after falling below $100 per barrel to just over $97 recently. The fall comes as a result of a weak economic outlook, a worsening debt crisis in Europe and a steady rise in global crude stocks.
The average TCE earnings on the TD3 route (based on slow steaming) have dropped 73% from their recent high of $47,500 per day at the start of April to only $13,000 per day last week; the lowest level since October 2011 and near average VLCC operating costs, minus finance.
In a stronger market, the relative reduction of an additional $100 per tonne in bunker costs would bring significant value to owners. However, in a falling market, it can only bring them frustration, Gibson said.
This scenario is similar with Suezmaxes, but not as extreme, as earnings were down 43% from their May 2012 high of $36,500 per day, to $20,750 per day as of last week.
This downwards trend in oil prices could exacerbate in the short-term, riding on the back of continued economic concerns, high crude production levels and record stock levels in the West. It then remains to be seen if owners can hang on to, or even push up current spot rates to reverse the decline in earnings, Gibson said.
However, the fundamentals are currently relatively weak and the outcome of last week’s OPEC meeting to maintain production limits is neutral, as opposed to the potential positive developments from the Saudi proposal to raise output and the negative implications of other OPEC members’ call to cut output.
This leaves the potential repercussions from Iranian sanctions as the likely key market driver for higher VLCC earnings in the next few months.