Freight rates for VLCCs on the East of Suez routes have tumbled sharply as winter demand to move crude has been mostly met and refinery maintenance season loomed, market participants said Wednesday, February 4.

The recent uptick in crude oil prices also dampened demand for VLCCs for floating storage, they added.

VLCC rates have been consistently falling since late January and the key Persian Gulf-Japan route was assessed at w59.5 Tuesday, the lowest in almost a month since January 20.

A couple of ships were placed on subjects overnight at below the psychological rate of w50.

“Even though these were no sire ships but the damage is already done,” a source with a VLCC owner said.

No sire ships are those that are not approved by oil majors and typically command a discount to market rates.

“Current VLCC rates on the PG-North Asia route will be w50 but we hope it will bottom out in the late w40s,” the source said.

Chartering activity for February loadings in the Persian Gulf has been slow, which indicated that demand to move crude had weakened and the requirements for winter in the Northern Hemisphere were mostly covered, market participants said.

So far, around 80 cargoes for loading in February were already covered and there were less than 40 now outstanding, brokers estimated.

The number of fixtures was similar to a month ago when chartering activity gathered momentum after market participants returned from the New Year holidays.

A similar trend was expected ahead of the Lunar New Year in mid-February, shipowner sources said.

Charterers, however, were less optimistic saying that February being a shorter month a surge in activity was unlikely.

A charterer source with a Japanese refiner said that the market was softening with few fixtures and that was affecting shipowners’ sentiment.

Even if the rate falls to w40, owners will still continue to earn a sizeable profit because of lower bunker prices in the second half of last year, the source said.

Bunker fuel in Singapore was around $317/mt compared with $600/mt eight months ago, brokers said.

Despite the recent decline in rates, at current levels, owners are still earning around $43,000/day on the Persian Gulf to North Asia routes, according to brokers’ estimates.

FLOATING STORAGE

Market participants also blamed the lower VLCC rates on waning interest in floating storage. The contango in crude oil prices led to the expectation that a few dozen VLCCs would be hired for storage.

Around two dozen VLCCs were taken on time charter last month with the option of being used for storage, but many of them are still available in the market and some are even being put into existing tanker pools for spot voyages, an official with a shipowner said.

“Floating storage is turning out to be a big disappointment for owners,” a VLCC broker in New Delhi said.

The downward correction in rates has been much larger than expected by the shipping industry, a VLCC broker in Singapore said.

With South Korean charterers having fixed no sire ships, other charterers have been lured into the market to take advantage of the lower rates, the broker added.