On Friday, Oct. 11, headlines blared of crude-tanker rates topping $300,000 per day, but the reality didn't quite match the initial hype.
Those numbers were for conditional deals, known in the industry as "on subjects." Panicked charterers spent the following weekend calming their nerves, and the following week, they backed out. The charter negotiations failed. The highest rate in October that was actually "fully fixed" with "subjects lifted" (confirmed) was at around $200,000 per day, according to Jefferies shipping analyst Randy Giveans.
Fast forward five months to this Friday. The "last-done " spot rates for very large crude carriers (VLCCs; tankers that carry 2 million barrels of crude oil) were back to October's stratospheric levels, driven by a Saudi Arabian export spree. This time, there have been almost no failed deals — and the rates still appear to be rising.
As of 1 p.m. Friday EST, fully fixed and confirmed rates had yet to top the October peak, but the market situation feels even better this time around than in October, Giveans told FreightWaves.
Typically, he explained, charterers put ships on subjects for two to three days to get the contracts signed by supervisors, and some charterers have abused this process to wait to see if rates on offer decline in the coming days. If so, they cancel and renegotiate. This week, the lofty rates placed on subjects Tuesday and Wednesday have been followed by even higher prices later in the week.
On Friday, Saudi Arabian shipping company Bahri put the VLCC Sea Splendor on subs at $369,456 per day for a voyage from the Middle East Gulf (MEG) to the U.S. Gulf, according to the Tankers International (TI) commercial pool. Earlier that day, the DHT Lake was put on subs at $280,415 per day for a voyage from the MEG to China.
The fully fixed six-figure-per-day deals from earlier in the week reported by TI include the Boston (MEG to Red Sea) at $194,979 per day; Kos (MEG to China), $181,821 per day; Chryssi (MEG to China), $159,840 per day; Atromitos (MEG-China), $167,031 per day; Syfnos (MEG to China), $131,317 per day; Agios Fanourios I (MEG to Red Sea), $128,436 per day; Landbridge Prosperity (MEG to Korea), $127,663 per day; and Astro Chloe (Mexico to India) at $114,763 per day.
TI has reported one contract failure: The Skopelos went on subs on Thursday (MEG-China) at $230,000 per day, and the deal was cancelled the next day. All eyes are now on the fate of the contract for the Maran Antares, which was put on subs on Wednesday (MEG to Thailand) at $310,505 per day.
There were widespread fixture failures during the October 2019 peak. Given that almost none of the current deals are failing, and given the record day rates for ships put on subs Wednesday and Thursday, the topping of the October highs appears likely and imminent.
The caveat is that spot rates ultimately hit a limit where it doesn't make sense for refiners and traders to take the deal because the freight cost erases their margins. That ceiling halted the VLCC spike in October.
According to Frode Mørkedal, managing director of research at Clarksons Platou Securities, "Current freight rates are starting to look elevated when compared with refining margins, which raises the question of how long this can last.
"In October 2019, when rates spiked to similar levels, freight contracts never materialized as charterers didn't lift subjects. However, we hear from brokers that the last few days very healthy freight levels are being lifted, which we think is a strong testament and points to actual earnings looking at breaking new records."
He continued, "A news report this morning from Bloomberg says Sinopec is looking to defer some April volumes from the Middle East as freight is above 20% of the cost. However, we would note that Unipec and other Chinese charterers have not really been in the market of late and hence we don't think this is material.
"Fundamentally, the current spike in rates is driven by a surge in Saudi oil production and hence can be seen as an oil supply push, which we argue would happen almost irrespective of what refining demand is in the short term," Mørkedal said.
This week's surge in rates for VLCCs has buoyed listed tanker owner stocks, which have emerged as an investor hedge and haven amid the Wall Street carnage. Over the past week, the share prices of DHT (NYSE: DHT), Frontline (NYSE: FRO) and Euronav (NYSE: EURN) have risen 28%, 20% and 18%, respectively.
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