The cost of chartering a supertanker to load Middle East crude into Asia has risen again from a 19-month low in September, but industry sources say production cuts led by Saudi Arabia are weighing on freight rates will limit the rest of the year.
The world’s leading very large crude oil carrier (VLCC) export route from the Middle East Gulf (MEG) to Japan, known as TD3, rose to W50.46 in worldscale freight rates on Monday, LSEG data showed. In September it fell to W35.60, the lowest level since February 2022.
Freight rates fell after Saudi Arabia began cutting production by another 1 million barrels per day starting in July. To add to the pressure, the leading OPEC member, along with major producer Russia, extended its supply cuts by a total of 1.3 million bpd through December.
“VLCC rates have improved as Saudi crude exports this month rose back to July levels. Saudi Arabia is meeting its October delivery nomination while sending more crude to the West,” said Anoop Singh, global head of shipping research at Oil Brokerage.
However, Singh said it was unlikely that VLCC rates would reach the highs of last year’s fourth quarter or the levels suggested by tanker futures markets.
“We expect Saudi Arabia will not be able to maintain these export levels and that U.S. crude exports will stall as production stops growing and U.S. refineries return from maintenance,” Singh said.
China’s buying appetite is likely to weaken as it uses crude oil from its record-high inventories, he added.
Voluntary cuts by the Organization of the Petroleum Exporting Countries and allies, particularly Russia (OPEC+), sent freight rates for branded routes across key crude tanker classes earlier to 2023 lows, said Ioannis Papadimitriou, senior freight analyst at Vortexa.
Changes in price spreads that began last week between West Texas Intermediate and Brent and between Brent and Middle East crude in Dubai have also weakened the economics of transporting oil between regions, which could result in ships having to travel fewer long distances .
“With the tight WTI-Brent spread potentially restricting further flows to Asia, this could result in stable to higher volumes in the Middle East,” said Emril Jamil, senior crude oil and fuel oil analyst at LSEG.
“In terms of (freight) rates, we could see a small increase in the fourth quarter, but October could still be weak,” Jamil said, adding that he expects weaker crude oil volumes to China in October due to a decline in refining margins.
An Asian shipping company source, who spoke on condition of anonymity because he was not authorized to speak to the press, said crude oil supply was “much lower”, demand was not increasing and many ships were available, meaning prices were likely to rise would not rise much.
Beyond this year, however, some tanker operators expect broader demand growth.
“We see markets that can persist for at least a few years,” Heidmar CEO Pankaj Khanna said at a Capital Link shipping conference in London earlier this month.
“(With) new trading areas like Guyana where we are seeing an increase in ton-miles of crude oil and products. This further adds to the demand side,” said Khanna.
Source: Reuters (Reporting by Jeslyn Lerh in Singapore; Additional reporting by Jonathan Saul in London; Editing by Florence Tan and Barbara Lewis)