30th July 2010 - VLCC Earnings - Back To 2009 Level?

July has proved to be the weakest month of this year for very large crude carriers. Daily earnings on the Middle East/Japan trade have averaged $23,500/day, the lowest level of returns since October 2009 and considerably below the average of $57,000/day achieved in the 1^st six months of 2010. But even at this level, VLCC earnings remain well above the lows seen in 2009 ($11,000/day in September 2009) and are around double the level needed to cover fixed operating expenses.

Surprisingly, this disappointing performance (from a ship owner's point of view) goes against key tanker fundamentals. On the demand side, there are large scale increases in world oil demand, with global consumption recovering to 86.6 million b/d in the 2^nd quarter of 2010, up by a staggering 2.7 million b/d year-on-year (source: IEA). This rebound is mirrored in the spot market, with our analysis showing that last month the VLCC spot fixtures from the Middle East Gulf were at the highest in recent years. In terms of supply, the VLCC fleet expanded by just 14 units over the past twelve months, as a vast majority of tanker deliveries have been offset by scrapping and conversions to dry bulk and offshore projects (although some of these single hulls were not in full employment).

However, despite moderate net growth in the VLCC population and strong gains in demand, the VLCC market was reportedly oversupplied in July, with a long list of tankers available for loadings. This is partially due to a gradual decline in the number of VLCCs employed on storage duties, with 12 units coming off crude storage duties since early July. In addition, spot tanker availability was further propelled upwards by the presence of a few Asian relets. Other important factors behind the decline in rates are chartering patterns and a change in sentiment, fuelled by the fears that floating storage will come to a complete end.

Despite this doom and gloom, the short term prospects may not be as bleak as it appears. Oil demand is forecast to remain strong, supporting the tanker industry. Also, VLCCs operated by NITC for temporary floating storage are likely to remain off the market. Although 10 of these crude carriers have discharged recently or are about to discharge, they are not marketed in the spot market, with some doing shuttle runs from the Middle East Gulf to the Red Sea. And finally, there is always a possibility of unforeseen "external" events, such as hurricanes, accidents and politics, etc. that can abruptly change the conditions in the spot market...