Low freight environment shifts Americas-loading VLCC rate differentials

An extended low freight environment seen in the global VLCC, or Very Large Crude Carrier, market amid the coronavirus pandemic has left historical freight differentials for Americas-loading VLCCs in disarray.

Negotiations over the course of the week ending April 23 confirmed market participant expectations of shorter-haul East voyage rates narrowing in to freight for longer-distanced voyages to hubs in Central China and South Korea.

A lack of VLCC demand, namely in the Arab Gulf, has left owners hesitant to make the voyage to West Coast India as a lengthy list of available ships in the Arab Gulf tends to cannibalize opportunities for them to book US Gulf Coast-loading cargoes in a timely manner. The ships in the Arab Gulf that are free of cargo are looked upon as more favorable for charterers in the Americas as they hold more stable itineraries and can easily make desired laycans. A ship that is discharging at the West Coast of India could be set back an additional seven to 10 days to embark on a new voyage, one shipbroker said.

“It’s not as ironclad as it used to be,” the shipbroker said. “The problem with India isn’t port costs, the problem is that in a low market a [West Coast India] position is not as attractive.”

Historically, VLCCs discharging in Ningbo and South Korea command a $1 million premium to those unloading at Singapore, while West Coast India voyages typically trade at a range of $0-$300,000 below Singapore, with the spread occasionally moving wider in periods of unusually high freight levels. West Coast India VLCC freight was first assessed at a premium to Singapore on April 13, the first time since July 18, 2018.

Freight for the VLCC 270,000 mt Caribbean-WCI run was assessed April 23 at lump sum $3.68 million, down $25,000 from a week ago April 16, while the comparable 270,000 mt USGC-Singapore voyage ended the week down $100,000 at $3.3 million. The benchmark 270,000 mt USGC-China run, which reflects disports at Ningbo, China and all major ports in South Korea, was assessed at $4.2 million, $200,000 lower from April 16.

Ecopetrol confirmed market expectations of steep West Coast India-destined freight after it placed the Olympic Lion on subjects April 21 for a Covenas-WCI run at $3.675 million for a May 15-19 laycan. On the same day, Hyundai Oil Bank booked the C Guardian, a Trafigura relet, for an East Coast Mexico-South Korea run at $4.15 million, set to load May 25-30.

“Owners are giving a lot of pushback to India right now,” a second shipbroker said. “It’s being talked about as more expensive to go to [West Coast India] than Singapore, which is normally reverse. That’s why Ecopetrol is struggling.”

Ecopetrol was seen out in the market for several days, while HOB was said to have received approximately seven to eight workable offers, hinting at an almost bearish Far East market in comparison to the shorter-haul journeys.

A third shipbroker said charterers were frustrated because owners say they are asking for $3.6 million for Singapore but are willing to go with $4.2 million for South Korea, which skews the differentials.

The depressed freight has also pushed other historical differentials to shift in recent days, with the typical $200,000 premium of Caribbean-loading VLCCs versus USGC-loading ships moving into the two routes trading at parity with one another on Dec. 16, 2020. The spread has held at the $200,000 level since Platts began assessing the USGC-China route in March 2018. The increased importance of ballasting ships during times of continued muted tanker demand has left Caribbean voyages at a significant time advantage for shipowners, balancing out additional port costs incurred when loading in the Caribbean of approximately $200,000.

US crude exports to India could see headwinds

A lightening crude slate in response to changes in the country’s fuel demand has caused US crude exports to India to jump at the end of 2020 and remain elevated through the start of 2021. This has added fuel to the fire for a route that is seeing owner-resistant negotiations.

Since the week ended January 1, 2021, US crude exports to India have averaged 440,854 b/d, according to Kpler data. This well exceeds the 2020 average of 277,000 b/d and the 2019 average of 255,000 b/d, according to data from the US Census Bureau. This uptick, even in 2020 from 2019, came as India’s crude imports fell 10.3% year on year to 201.5 million mt in 2020, or 4 million b/d, according to data from the Petroleum Planning and Analysis Cell, a part of India’s Ministry of Petroleum and Natural Gas.

Some headwinds could come from a recent surge in coronavirus infections in India, although the nation’s government has pledged to avoid a national lockdown. Should infections continue to rise, however, regional lockdowns are not ruled out and could have an impact on short-term demand.

Still, even with rising infections in some countries like India, S&P Global Platts Analytics expects vaccine distribution to help curb the virus spread and lead to an improving global economy in the second half of the year. Platts Analytics has forecast 2021 global GDP to grow by 5.7%, but the improving economic outlook is not expected to be uniform across all regions.
Source: Platts