Supertanker double-whammy: Less volume, shorter hauls

crude drilling

“The unwinding period is going to be painful. It’s happening,” warned Michael Fogerty, senior vice president of commercial operations of Diamond S Shipping (NYSE: DSSI), during a quarterly call on Thursday. Fogerty was referring to the drawdown of crude stocks in Asia that have built up on land and at sea over the past several months.

The Asian drawdown hits very large crude carriers (VLCCs, tankers that carry 2 million barrels of oil) on two fronts. Not only is less crude flowing to Asia, but less is flowing on long-haul runs from the Atlantic Basin, slashing average voyage distance.

Atlantic Basin focus

“In recent weeks, the Atlantic market has been more active than the Arabian Gulf market in terms of loading VLCCs,” said Trygve Munthe, co-CEO of DHT Holdings (NYSE: DHT), on his company’s latest quarterly call.

“We’re suffering from a very low level of fixtures out of the Arabian Gulf,” he said. As a result, America and Brazil “are becoming more important load areas for the VLCC trade.”

Now, Asian destocking is putting a damper on Atlantic cargoes as well.

“You’re seeing that long-haul crudes, whether from the U.S. Gulf or West Africa, have basically stopped,” said Fogerty, whose company sails Suezmaxes (tankers that carry 1 million barrels of crude oil).

“China is being supplied basically mainly from the AG [Arabian Gulf] now on VLCCs,” he said. “One of the negative impacts with the destocking is … your ton-mile demand has fallen off.”

Ton-mile equation

Tanker demand is not measured in volume, but in “ton miles”: volume multiplied by distance. The longer the voyage, the more tanker capacity is tied up. The fewer ships open to bid on spot cargoes, the higher the rates.

Why are Atlantic Basin-to-China cargoes so attractive to owners and investors? The answer is that the U.S. Gulf-to-China route is around 2.5 times longer than the Arabian Gulf-China voyage. The Brazil-to-China route is around 1.8 times longer, the Nigeria-to-China route 1.7 times longer.

U.K.-based VesselsValue, a company that analyzes ship movements and estimates cargo flows, provided FreightWaves with its latest data on the average sailing distance per VLCC voyage over time.

The data paints a bearish picture. Last month’s average was 3,032 nautical miles per voyage, down 8.5% from May and down 10.5% year-on-year.

tanker chart

VesselsValue attributed July’s decline not only to lower exports from the Atlantic Basin to Asia, but also to lower volumes from Saudi Arabia to the U.S., and the Middle East to Asia.

US and Brazilian exports

FreightWaves received data from both VesselsValue and Kpler on Atlantic Basin crude exports.

crude export chart

The figures imply that the situation may not be as bad as Fogerty said on the call. Volumes are down over recent months, but they’re still up year-on-year.

crude export chart

China in the driver’s seat

One of the concerns on long-haul crude exports from the Atlantic Basin — particularly from the U.S. — is that production will be curtailed in the wake of the crude-price plunge earlier this year.

“Even assuming output recovers from May’s low, [the U.S.] is still set to record the biggest loss of any producer by the end of 2020, falling by 2.2 million barrels per day year-on-year,” said the International Energy Agency (IEA) in its new monthly report released Thursday.

The IEA expects Brazil production to increase by 150,000 barrels per day in 2020 year-on-year.

But whatever happens with production, the most important factor may be what China is willing to buy.

VesselsValue data on combined U.S. and Brazilian export cargoes by month and destination reveals just how dominant China has become to tanker volumes.

tanker chart

Terminals in China are now heavily congested as tankers wait to unload. As DHT co-CEO Svein Moxnes Harfjeld said on his company’s call, “Inventories are quite full in China. It takes time for refiners to consume these inventories — and that’s holding up ships.”

The hope among tanker owners is that once vessels off the coast unload, China’s thirst for both Atlantic Basin and Middle East cargoes will pick up where it left off. Click for more FreightWaves/American Shipper articles by Greg Miller 

MORE ON TANKERS: How are tanker owners coping with the floating-storage hangover? See story here.Tanker rate puzzle gets even harder to solve: see story here. How badly did tanker stocks perform in the first half? See story here