Shipbroker Charles R. Weber is quite optimistic on the future prospects of the VLCC market for 2016 onwards. In its latest weekly analysis, the shipbroker noted that demand is expected to remain elevated with spot voyages generating around 940 Bn Ton-Miles per quarter, on average, during 2016 – around 1.0% above our current estimate for 2015. Augmenting the impact of ton-miles on earnings is the increasing diverse geographic profile of trade routes; the scenario materialized during 2H14 and has prevailed through most of 2015.

According to CR Weber, “this trend is characterized by more long-haul voyages from West Africa, the Caribbean and North Sea, largely to points in Asia. These reduce the fleet efficiency as West Africa demand competes with the Middle East for tonnage while the Caribbean market has become short on tonnage, forcing the drawing of units from as far afield as the US West Coast, North Sea and Red Sea areas. These factors subsided by mid-Q3 and at time of writing have prompted a strong pullback of rates and earnings in the VLCC market. We believe that the present scenario represents a small blip in line with similar trends observed around September 2014, from which a fresh round of demand will support a rebound of the spot market”.

The shipbroker added that “generally, the strong VLCC market of past year – and the factors supporting it outlined above – have followed a surplus supply of crude in the market. The surplus is expected to remain through 2016 while world oil demand itself is rising due to lower prices. This should keep VLCC demand elevated and by 1Q16 should also prompt a second round of overwhelmed world energy infrastructure whereby delays for VLCCs result from the inability of shore side facilities to quickly process crude into commercial stocks”.

Meanwhile, in terms of supply, CR Weber said that “VLCC supply growth has remained low since 2013 and we expect that 2015 will conclude with a net growth rate of 0.8%. Phase-outs of older units have slowed during 2015 due to low scrap prices and the strong earnings environment. However, we expect that the pace of demolitions will accelerate during the upcoming year as owners avoid the capital expenditures required to comply with forward regulations. We project that the average age of demolitions will progressively decline from 22.5 years to 20 years in the coming years. In discussions with several owners, the same ideas have been echoed – the cost of compliance is too high for older units and phase outs will accelerate after this year. Nevertheless, fleet growth will accelerate during 2016 on a net basis with a 5.1% increase projected. Many of these deliveries will be from mid-year 2016 and as such we do not see a material adverse impact on the freight market from deliveries until 2H16 at earliest, but some pullback thereafter is expected”.

As, such the shipbroker concluded that “our base case scenario for 2016 VLCC spot market performance is as follows: Rates and earnings will follow a similar trajectory to 2015. Excess crude supply will continue to support a wide geographic distribution of demand and maintain lower fleet efficiency levels. World crude demand continues to improve due to lower prices and helps to absorb a sufficient portion of the crude glut to prevent large-scale floating storage and to prevent a large pullback in crude production. Low case: In a low case scenario, major crude suppliers pare back production to support prices, leading to fresh VLCC demand destruction. Amid lower demand, fresh NB deliveries incrementally weigh on earnings. By 3Q15, owners react by acting more quickly on phaseouts, which should restore some balance, though earnings would remain markedly lower than 2015 levels. High case: World crude demand is sufficiently stimulated by low prices as to hasten forward the inflection point where demand exceeds supply. A strong contango situation materializes in crude futures markets, leading to large scale floating storage. The removal of units from trading to service floating storage – coming amid a continuation of low fleet efficiency – would provide a major stimulation of earnings, leading to potentially record highs”, CR Weber concluded.

Meanwhile, in the VLCC markets this week, it was more of the same, “as expectations of busier inquiry remained just that, expectations, with each quieter day exerting further downward sentiment on rates. In fact eastbound rates have plunged over 65% from levels seen only a month ago, reaching new lows for 2015. In addition to the negative impact on the spot market, the continued lackluster pace is also raising the level of uncertainty going forward. The longer term view remains a positive one as producers continue to assert they will maintain the current elevated level of output, thus in theory keeping cargo programs and shipping movements higher. The lower Middle East cargo tally for August is being attributed to seasonal factors including an early refinery turn-around period. It was the slowdown in August that reversed market sentiment and changed a balanced supply-demand equation into one that heavily favors the Charterers. The belief of many Owners was that September would start to reverse that trend, bringing back the balanced position lists we saw over the first seven months of the year. However, the activity has yet to materialize and September’s first decade is on pace to record an even lower tally than last month when we saw only 34 fixtures through the first ten days of August”, CR Weber noted.

The shipbroker added that “the bearish sentiment in China puts a spotlight on the low number of cargoes destined for China to start September; through the first ten days we have seen only 5 fixtures bound for China, compared to 16 over that same period in July. This raises further questions as to how long the subdued cargo tally will continue; is it a seasonal blip with an extremely busy second half of September to come or will the reduced cargo tallies continue. Expectations of busier times ahead have been holding rates up, but each quieter day has put further downward pressure on the spot market. There were a total of 31 fixtures reported this week, 20 emanating from the Middle East and 11 from the Atlantic Basin. The former was led by eastbound business which accounted for all but two of those; eastbound rates hovered around the ws30 level, but a slow start saw the first non-India fixture concluded at ws28.5 (to Korea). Inquiry did pick up as the week progressed, but an over-abundant position list filled with “distressed” units mitigated the busier pace of inquiry and a low of ws26.5 was concluded for a voyage to Thailand. The latest fixture, was up, however as a ws32.5 was concluded for a restricted cargo to Thailand, but has yet to be followed up and rates are still sputtering just below the ws30 level. Westbound business followed a similar trend as rates to the USG, although inactive dropped below the ws20 level, with the current assessment at ws19 via the Cape and ws18 via the Suez. We have now seen 41 fixtures concluded for September; 32 within the first decade and 9 within the second. The first decade is arguably complete and we anticipate another 17 or so cargoes to appear through the first half of next month. The position list shows some 30 vessels, excluding VLCC Chartering, over that same period leaving the supply-demand equation in the Charters favor”, CR Weber concluded.