2017 Sep 29

Improved VLCC and Suezmax employment – a false dawn

We are starting to see a recovery in the percentage of the combined VLCC and Suezmax ‘employed’ fleet (defined as vessels carrying cargo, loading cargo or discharging cargo), based on our analysis of AIS movements data. By the end of August, we calculated that 51% of the large tanker segment was employed, up from 48% at the end of July but down from 53% at the start of the year, as illustrated by the chart below.

It might be expected that an improvement in the employment indicator would coincide with an improvement in rates. The fact that it did not for large tanker rates was in part because some of the increase in employment was due to a significant fall in the number of vessels in storage, with many of these vessels, eg vessels in the North Sea, being ordered to Asia to discharge. This analysis counts vessels used as floating storage as not employed, while the delivery leg after storage is counted as employed. Backwardation of oil prices – where forward oil prices are lower than spot prices – was a key trigger behind falling storage numbers.

Even more worryingly for tanker owners than the failure of freight rates to respond to higher employment levels is that the upward tick in employment may prove to be a temporary phenomenon with the former storage vessels returning to the market and adding to the already swollen levels of waiting vessels, thus further depressing rates.

Focusing on VLCCs, we have observed a fall in storage numbers from around 70 units at mid-year to 40 vessels by the end of August. The chart above reveals that this fall was most pronounced in Singapore and other Asia locations. By contrast Middle Eastern VLCC storage has been in decline for most of the last 12 months. Having been the most important storage location for VLCCs at the end of 2016, it now registers just a handful of storage units. The decline in Middle East floating storage has a lot to do with the exodus of Iranian vessels from this market. We estimate that there is just one Iranian unit still in storage from a peak of 20 units in October 2016. Although most of these vessels have entered the oil trades some vessels have recently been observed at anchor waiting for cargo, and these vessels may eventually work their way back into storage if the market remains depressed.

The Iranian vessels notwithstanding, we do not expect to see a significant recovery in floating storage in the near term. One reason for this is that the severe hurricane season in the US has depressed crude oil demand while leaving oil production relatively untouched – thus delaying market rebalancing and keeping oil prices lower than expected over the next few months.


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