Freight rates last week declined at a rapid pace in both dirty and clean tanker markets, reversing two consecutive weeks of gains, amid a lack of cargoes and demand destruction. The outlook for this week remains bearish, with charterers looking to profit from the lower rates.
The closing week of April showed a preview what market participants said was an inevitable softening in spot rates, with VLCC shipowners seeing rates halve in only a week to reach Worldscale 65 on the West Africa-to-East route Monday. The last time rates were assessed this low on the West Africa-to-East route was on March 3, just before Saudi Arabia flooded the market with cheap oil to force OPEC+ members to agree to cuts.
Last week, the first impact of the production cuts agreed by the OPEC+ group started to be felt in the market, with the number of cargoes being considerably down compared to previous weeks. The majority of May-loading programs west of Suez, which came last week, showed significant declines month on month and contributed to the bearishness in the market. Urals programs shrunk by 40% between April and May, and expectations for the final Caspian Pipeline Consortium loading programs due to come out are bearish. From Angola, final loading programs last week saw reductions in cargo output from the preliminary programs, as Angola had pledged to cut an average of 1.18 million b/d in May and June as part of the recent OPEC+ deal. Freight was also pushed down by charterers using more discounted relet ships, which added to the competition.
While demand was heard improving from China, and de-confinement efforts in Europe might help reduce oversupply, the global overhang of physical crude meant positivity has yet to affect the spot freight market. Floating storage activity, which has pushed spot market up in March, does not seem to pick up yet given the current contango not supporting floating storage economics. However, declining freight rates and inland storage nearly full might lead to more storage demand despite the lower benefits.
While the outlook remains bearish amid reduced cargo output, available tonnage to do spot voyages has diminished given time charter bookings. This means that while rates might continue softening, it is unlikely there will be a similar situation as February, when demand reduction from China had caused dirty freight rates to reach depressed levels.
Clean tanker shipowners have to contend with increased downward pressure placed upon them from charterers, with medium range tankers in particular experiencing the sharpest falls which has led shipowners to face the stark reality of fundamentals at play.
Freight indications for UK Continent-US Atlantic Coast dropped from as high as w440 on April 27 to w180 on May 4, completely wiping out all gains made when clean markets experienced record highs two weeks ago. Now, market participants expect charterers to be more aggressive.
“Two weeks ago it was shipowners picking and choosing rates that they wanted,” a shipbroker said. “Now, it seems like it’s the charterers’ turn. Ballasters from West Africa and the US have put the pressure on in the European markets.”
A similar situation is developing in the Mediterranean Handysize markets, where shipowners have had to contend with a dearth of cargo inquiries last week and envisaged quietness heading into this week.
CLEAN TANKER MARKET VOLATILITY
Charterers were determined last week to sweep cargoes off the market with the aim of cooling sentiment, highlighting that freight for a number of routes on all vessel sizes were not workable at inflated levels.
But attention has now been drawn to the long range tanker market, with no fixtures recorded last week placing LRs in a very uncertain position. Some market participants see rates inevitably falling as fresh eastbound stem was placed on MRs for shipments east. But others argue that strong Persian Gulf-UKC rates due to a lack of available LR tonnage will lead to owners ballasting to the Middle East for an attractive backhaul rate should they not receive a good rate loading in the Continent. Rates therefore are in need of a fresh test to gauge market direction.
Finally, conversations surrounding dirty tanker conversions to the clean tanker market have quelled in light of the sharp dropoffs experienced in the latter. Despite Aframax owners showing clear interest at the beginning of last week, the uncertain position that long range tankers in the clean market find themselves in has put off dirty owners, who could end up in a rapidly cooling market by the time vessels complete the typically two-week cleaning process at a cost of $500,000 plus.
Handysize owners similarly have cooled conversions to the clean side as the gap between both markets narrow. Freight indications for Black Sea-Med shipments basis 30,000 mt on dirty tanker markets were assessed at w335, while Black Sea-Med rates for clean tanker markets were assessed at w400, with more softening to come.