VLCC and Suezmax freight rates have hit record highs in the fourth quarter of 2018, largely due to US sanctions on Iran being reimposed in November. However, the high prices being enjoyed by shipowners may not last, as the OPEC+ production cuts and the growing global fleet promise to bend supply and demand fundamentals against shipowners.
FREIGHT RATES INCREASE IN Q4 2018
Suezmax freight rates for Black Sea-to-Mediterranean voyages hit a more than three-year high mid-November due to tight tonnage caused by a surge in demand from Eastern refiners for Mediterranean crude grades. The Black Sea-Mediterranean Suezmax route, basis 135,000 mt, was assessed at $15.16/mt on November 19. The last time rates were assessed higher was May 20, 2015.
There has been a huge volume of crude oil going East from the Mediterranean and the Black Sea, with many charterers looking at Mediterranean grades as a replacement for Iranian crude volumes.
This has increased ton-mile demand (distance traveled multiplied by the volume of cargo) and meant that the vessels took at least a month to ballast back to the Mediterranean after unloading in China.
VLCC prices also reached a near three-year high in West Africa in December. The VLCC route from WAF to China, basis 260,000 mt, was assessed at $25.17/mt on December 3, its highest level since January 11, 2016.
The driving force behind the rising freight costs in WAF was the Persian Gulf market, with Eastern refiners buying additional barrels from the region because of an anticipated supply squeeze caused by the re-imposition of sanctions on Iran.
OPEC CUTS TO HIT TON-MILE DEMAND IN 2019
However, in spite of the Iranian sanctions reducing its output heavily OPEC has agreed major supply cuts to avoid a crude oil supply surplus building up.
The OPEC/non-OPEC coalition has agreed 1.2 million b/d cuts even as Iran secured an exemption. The cuts are effective from January 2019 and it is hoped that they will shore up flagging oil prices.
The result no doubt came as a relief to Saudi Arabia, which had strongly pushed the cuts, but saw several OPEC members — notably geopolitical rival Iran — seek exemptions that threatened to undermine the deal. Even close ally Russia put the squeeze on Saudi Arabia to bear more of the cuts.
In the end, the kingdom agreed to exemptions for Iran, Libya and Venezuela. OPEC would cut 800,000 b/d under the deal, or 2.5% of production for each member, with the 10 non-OPEC partners slashing 400,000 b/d, or 2%.
These cuts will hit demand for tankers in the first quarter and though bad weather will persist in key loading areas which will likely lead to higher rates, fewer cargoes will be shown to the market, sources said.
FLEET KEEPS GROWING DESPITE HIGH DEMOLITION
A huge number of vessels have been sent for demolition this year and from January-November a total of 15.7 million deadweight tons was scrapped in the Aframax-VLCC tonnage range, compared with 5 million dwt in the same period in 2017, according to Bancosta data. This will go some way towards clearing out excess tonnage and older units.
However, in spite of the increase in scrapping, deliveries of new tonnage still outpaced demolitions. There is expected to be 20 million dwt delivered this year, compared with 25.8 million dwt in 2017.
This still gives the market a net fleet growth of a 4.3 million dwt against the expectation of diminishing ton-mile demand in 2019, leaving the outlook for freight rates increasingly uncertain for the next year.
There Is a Steady Growth in the Number of Indian Seafarers Employed: Dr. Malini V. Shankar, (IAS), Director General of Shipping
India Shipping and Offshore Summit