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Rising US crude exports promise more earnings for VLCCs from longer voyages

by August 21, 2017 General

The US gradually turning into a key exporter of crude will support freight rates because of the prospect of more longer voyages, according to market participants.

Shipowners are now planning their voyages in such a way that they can pick up cargoes of US crude for delivery to Asia.

US crude imports were estimated by EIA at 7.87 million b/d last year, down more than 14% since the beginning of the decade. The US is now exporting crude equivalent to 13% of its imports.

For several decades, the Middle East-to-US Gulf has been a key route for VLCCs. As volumes on this route gradually fall, it is becoming less liquid and the opposite route from the US to Southeast Asia is gaining traction.

“Ships want to take cargoes to the US, so that they can then bring back a US crude or condensate cargo into Asia,” said Masood Baig, director of Singapore-based Straitship Brokers.

VLCCs do not want to ballast all the way to the US Gulf from Asia and need a front haul cargo, but sometimes they have no choice, he said.


So far this year, close to 35 VLCCs have loaded crude from the US, up from merely six in the same period last year, and only 20 in the whole of 2016, according to data from UK-based shipping consultancy VesselsValue.

It is certainly very interesting that while US crude loadings on Aframaxes have held steady, those on VLCCs and Suezmaxes increased dramatically this year, William Bennett, a trading analyst with VesselsValue, said.

VLCCs, Suezmaxes and Aframaxes typically load cargoes of up to 2 million barrels, 1 million barrels and 750,000 barrels respectively.

“VLCC loadings are extending the reach of US crude cargoes to China, Malaysia and Singapore,” Bennett said.

Such long voyages are providing the much needed ton miles to the cash- strapped VLCC market.

Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. It indicates the average distance a ship covers to deliver every ton of cargo. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same or conversely, it offsets the increase in supply of tonnage.


US export volumes are small compared to the Middle East to make a difference to the tankers’ market, said Fotis Giannakoulis, a New York-based executive director at Morgan Stanley Research.

Nevertheless, VLCC brokers, owners, charterers and analysts are quick to point out that the importance of US exports cannot be underplayed as they are providing an incremental demand that is critical to shore up earnings when newbuilds are adding to the global supply. Increasingly, more VLCCs are finding employment on the West-to-East routes, helping to absorb some of the glut.

More than two dozen VLCCs are expected to be delivered in the second half of this year and this translates into an average of one super-tanker a week, Baig said. As a result, every week, at least one cargo can be covered by a VLCC at a discount in the spot market. New ships are typically available below market rates because they are not fully approved by oil majors and there is also some loss of cargo as crude gets stuck to its tank walls, a phenomenon that is called clinkage.

“The ton miles of US crude exports paint a dual picture that loadings have increased and they are shipping further away,” Bennett said.

VesselsValue data shows that US crude exports rose to around 135 billion ton miles in the last quarter, more than double the 64 billion-67 billion ton miles each in the first three quarters of last year. China, Malaysia and Singapore have lifted US crude on 16 VLCCs, 12 Suezmaxes and 14 Aframaxes, so far this year, the data showed.


At current rates, a Carribean-to-Singapore voyage can fetch around $1.55/b to a VLCC owner and keep it employed for a long duration of 36 days compared with earning less than a third of this on a Persian Gulf-Singapore voyage of 12 days, according to brokers’ estimates.

VLCCs that deliver Middle Eastern crude to Europe look for North Sea barrels to load for their next voyage.

Straitship’s Baig pointed out that there were usually not more than half-a-dozen cargoes each month for these VLCCs to pick up from the North Sea for delivery to Southeast Asia.

“If a VLCC misses out on these cargoes, either it has to ballast to the Mediterranean and pick up a cargo from ports such as Arzew or sail all the way to the Caribbean and the US Gulf,” he said.

A 12-15 days ballast leg has to be factored in by the owners of these VLCCs and it is here that the importance of rising US crude exports comes into play, he said.

“More crude being exported out of the US is good for the troubled dirty tankers’ market because it will reduce the ballast leg of ships that deliver Middle East grades to the US,” said Luigi Bruzzone, a Genoa-based researcher with Banchero Costa, a global shipping research, consultancy and brokerage. Traditionally these ships had to ballast to Caribbean or West Africa to pick up their next parcel.

US export volumes of around 1 million b/d are almost similar to that of Algeria and just over a tenth of Saudi Arabia, he said.

At present, only LOOP in Louisiana and Corpus Christi terminal in the Gulf of Mexico are capable of receiving VLCCs.

“As more terminals get ready to load super tankers, we could see a regular crude trade out of the US Gulf,” Bruzzone said.

In what will eventually be a major shot in the arm for US crude exports, India has bought some parcels and the volumes are bound to increase. India aims to double its refining capacity over the next two decades to over 400 million mt.

As India’s crude intake increases, larger shipments will come from the US and Latin America.

India’s state-owned refiners have accelerated purchase of spot cargoes of crude in addition to the usual deliveries under long-term contracts. This has led the state-owned companies to bid in response to crude tenders including the ones from the US and Canada.

India has already bought more than 1 million mt of Russian crude in the first five months of this year. Winning crude purchase tenders in the West will translate into more long-haul voyages to India for VLCCs and Suezmaxes.

“Expanding and setting up new state-of-the-art refineries enables diversifying the crude basket. Like coffee roasters, all suitable grades can be blended,” Baig said.
Source: Platts