VLCC Earnings Set for Strong Growth

MSI’s proprietary tanker market model predicts firm earnings scenario in first half of next year before weight of fleet growth starts to suppress rates

London, December 15, 2015. The latest Tanker Freight Forecaster from Maritime Strategies International predicts further upside volatility in the crude tanker market in 2016 as a result of OPEC’s decision to effectively maintain oil output levels.

Average VLCC spot earnings for the Baltic Exchange’s ME-Japan voyage (TD3) have exceeded $100,000/day in the first half of December.

Over the six-month horizon of the latest report, upside potential remains high, with a combination of burgeoning trade and continuing low prices supporting global oil consumption and suppressing domestic crude production in North America.

Logistical constraints continue to restrict tonnage across markets with weather playing an important role recently as well. Analysis by MSI shows that at the end of the first week of December between 30-35% of the VLCC fleet was not underway, being either moored or anchored.

Tim Smith, Senior Analyst at MSI, said, ”The decision by OPEC to keep the taps open implies that the inverse relationship between the crude price and VLCC rates will continue, presenting clear upside potential over the next six months. A scenario in which crude oil prices are suppressed across 2016 could lead to a boom in tanker earnings of comparable magnitude to 2007/8.”

The MSI analysis cautions that fleet growth - 2016 will see the second highest annual level of tanker deliveries ever - will start to impact the market through the second half of the year.

Other crude tanker segments are also performing strongly and MSI predicts are likely to see more upside in December and into January as crude oil prices deteriorate.

Suezmax spot earnings gained in the second half of Q4; both the Atlantic and Black Sea markets continued their progress from October. West Africa – Europe spot earnings increased to an average of $59,500/day in November and have held close to that level in December.

Although these markets haven't yet seen major gains, Suezmaxes in the Middle East were reportedly tracking increases seen for VLCCs, suggesting higher rates will spread across the market through December.

Aframax spot earnings also rallied in November, building on gains made in October. As in the Suezmax segment, further upside has yet to be seen in December from November levels, although given the magnitude and timing of the rise in the VLCC market this cannot be ruled out.

Aframaxes are likely to see fewer benefits from strong Middle East output than their larger counterparts and production in established loading regions such as Latin America and the North Sea is vulnerable to low crude prices and competition from larger sizes and long-haul trades.