Optimistic on VLCC Market

 

The demand is expected to remain elevated with spot voyages generating around 940 bln ton-miles per quarter, on average, during 2016 – around 1.0% above our current estimate for 2015, says its latest weekly analysis.

 

 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.

 

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.

 

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

 

VLCC supply growth has remained low since 2013 and we expect that 2015 will conclude with a net growth rate of 0.8%.

 

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, says Weber report.