Very Large Crude Carriers (VLCC) are tanks with a capacity of 200 tons and above dead weight (Alizadeh & Talley, 2011). They are usually used in long-distance transportation of crude oil from the point Gulf regions and Asia to the United States and Western Europe through the Cape of Good Hope. The crude oil is then refined at the destination and either used locally or exported. Oil transportation primarily uses two methods, pipeline transport or tankers (both and sea). However, for the long voyages, in areas lacking pipelines, VLCC is the preferred choice since it is economical and relatively safe (Merikas, Anna, Polemis, & Triantafyllou, 2014). Even in comparison with other tankers like Aframax, Panamax, Suezmax, and ULCC, the VLCC’s carrying capacity still makes it cheaper.
Understanding the trend in VLCC tankers trade requires knowledge on the oil market. Economic or political factors that directly or indirectly affect the oil market have a direct impact on the VLCC trade (Lun, Hilmola, Goulielmos, Lai, & Cheng, 2013). The forces of demand and supply in the oil market significantly influence the trends in VLCC trade. For example, when there is a high demand for oil in Western Europe and the United the more VLCC tanks are required to facilitate the movement hence rise in demand. On the other hand, fall in demand for oil and oil products in the global market also results to decrease in demand of the VLCC tanks (Lun, Hilmola, Goulielmos, Lai, & Cheng, 2013). In other words, it is only possible to understand the trends in VLCC tanks market by first analyzing the global oil market.
A preview of the past trends in oil market (between 1976 and 2009) reveals the close relationship between the oil industry and VLCC tanker trade. Approximately 3.9 billion tons of oil was transported during this period. Out of the 3.9 billion, 2.9 were transported through the sea (Lun, Hilmola, Goulielmos, Lai, & Cheng, 2013). Therefore, the oil companies had to look for a cheaper option of carrying the product to the US and Western Europe a fact that is revealed by the increase in demand of the VLCC tanks over the same period.
Since the beginning of 1993, there has been an upward trend in the demand for the VLCC tanks, though it is not constant due to the fluctuations in the oil market (Zacharioudakis & Lyridis, 2011). For example, 2008 saw the oil price reached its peak at $147 a barrel. The same year in January the prices surpassed the $100 a barrel for the very first time (Singleton, 2008). However, by the end of the last quarter of the same, the prices had gone by low by over 100 percent and were selling at $35 a barrel. The same trend continued the following year making 2009 was perhaps one the worst years in the oil industry as the prices hit an all-time low.
Demand and Supply of VLCC tankers
The crash demands in the 1970s lead to the transformation of spot market transaction to 90 from 10 percent (Lun, Hilmola, Goulielmos, Lai, & Cheng, 2013). Consequently, the demand for larger carries also went up leading the sharp rise in the demand of the VLCC tankers. However, the supply of VLCC exceeded the market demands resulting to fall in price. The manufacturers then resorted to reducing production of the tankers to stabilize the prices. Just like any market the VLCC tankers trade is determined by the forces of demand and supply, these two market forces interact to create an equilibrium price.
The demand and supply of the VLCC tankers rely on two aspects of the oil market, the oil prices, and consumption trend. A rise in oil prices encourages the producers in the Arabian Gulf and Asian region to export more oil to the refineries in the United States and Europe. As a result, the demand for the VLCC tankers goes up. Additionally, the increase in the global consumption directly results in the rise in shipping of crude oil to the refineries. As a result, the demands for the carriers go up. In essence, the trade in tankers, not just the VLCC, has a direct relationship with the oil consumption and prices.
Besides, oil companies also have significant contribution to the demand of the tankers. Prior to 1970, the oil industry was under the control of seven companies Shell, BP, Esso, Mobil, Texaco, Gulf, and Socol-Chevron (Jaffe & Soligo, 2007). However, the market began to open up in in the late 1970s and by 1973 it was also already liberated from the ‘seven sisters’ as smaller companies joined the industry. Even though the market is currently liberated and has several small players, these big companies still control nearly six percent of the total market share. These ‘oil Major’ still own a significant number of the crude oil fleets and the chattering pattern directly influences the demand of the VLCC tankers. In case they opt for larger carriers, the demand for the VLCC tankers goes up whereas that of smaller ones like Aframax and Suezmax goes down.
A report by Ardent in their mid-year publication indicated that most VLCC tankers were ordered by big companies owned by the Greek. As at the time of the publication of the report (mid last year) there were orders of nearly 119 vessels, with brokers indicating there was a possibility of more purchases (Tankers Shippers and Trader, 2017). The report further added that VLLC builders would certainly consider raising the prices due to the considerable demand for the product.
Another economic factor that impacts the VLCC tanker market is the cost of fuel required to manage the fleet. As noted earlier, VLCC tankers have a huge carrying capacity that goes above 200.00 tons meaning they require a significant amount of fuel to complete reach their destination. The number fleets that accompany is likely to higher for transportation of the crude oil will depend on the cost of running the fleet and the prevailing market oil prices. The transportation cost is always transferred to the final consumer of the product through the refineries. In a situation where the transporter is the producer of the crude oil then the company will transfer the cost to the buyer who in turn transfer the cost to the end user.
Therefore, the oil prices affect the demand for the VLCC tankers on two aspects. Firstly, through the cost of running the fleets which are influenced by the prevailing oil prices and secondly, by influencing the profitability of the transportation. Higher prices of refined oil used as fuel means the cost running the VLCC tanker fleets across the sea to the United States or Western Europe is costly and eats into the companies’ profits. The situation gets worse if the cost per barrel is low as it means the companies experience fall in their income. Perhaps this one of the major issues the companies, especially smaller ones, have had to deal since2014 when the oil prices began to fall. Indeed most companies have been significantly affected by the low prices of crude forcing them to come up with ways of cutting their costs. Some of the actions that have been taken with aim of reducing operating cost include reducing the number of employees, and number of fleets.
Besides the cost running the fleets, the prevailing market prices directly impact affects the demand for the fleets. Higher prices mean results in the decrease in the demand for the refined oil and its products. Consequently, the fall is reflected in the demand of the crude oil thus lowering the intakes at the refineries. Reduced intakes at the destinations result in fall for the demand of the voyagers which negatively impact the business.
2017 VLCC tankers Trade
Last year was not one of the good years for VLCC tankers traders due to the market’s dismal performance, the average rates went down by nearly 50 percent. The fall was reflected in other areas related to the business such as the asset prices and shrinking investment opportunities. Industries traders are hoping this year will be better; even there are market indications that the earnings are likely to remain low due to oversupply (Maritime News, 2017). Towards the end of last year, Fitch Ratings predicted continued oversupply will result from the limitations in scrapping older ships and excess supply of new vessels. However, the agency forecasted a slight increase of four percent by the end of this year. Towards the end of last year ship broking, Allied Shipbroking, indicated that on TCE VLCC rates averaged US$ 10500pd. The figures were nearly a third of the 2016 rates that stood at US$ 30,400pd (Tankers Shippers and Trader, 2017).
Even though last year was not one of the best in the tanker business, the started on a relatively positive note with the order of 119 vessels (Tankers Shippers and Trader, 2017). In the month of February and March, the VLCC order books indicated that there was only a reduction of 16 vessels from 1111 to 1095. However, as the year progressed situations got worse with fall in demand of the vessels.
The oil prices in the global market last year were not impressive as the market has not fully recovered from the deep in prices. On average a barrel went for just above US$50, a 90 percent increase from 2016 prices. However, the price was still lower than US$115 the highest ever recorded since the recession in 2011. The price fall began in 2014 and the market is currently trying to readjust to deal with the low prices. For instance, companies have made several adjustments including laying off staffs. The shipping firms also have had to deal with the reduced income and indeed one of the areas affected is the purchase of VLCC tankers.
Last year’s December report by Organization of the Petroleum Exporting Countries (OPEC) indicates that the VLCC market was the most balanced compared to other tankers like Afrimax or Suezmax. However, the balance of the freight rates was due to other others such as delay at the ports, especially among the Asian ports.
The report further indicates that the VLCC spot freights rates had a slight increase compared to the previous month which stood at WS55 points. Perhaps the sale of newer ships remained low due to their prohibitive prices forcing the traders to opt for older ships which are affordable. The low demand for the new ships means that most the good prospect the builders had at the beginning of the year was not tenable. The most affected route was the EAST-to-East where the rates reduced to WS67 points whereas that of West Africa-to-east was the least with a rate of WS28 points. In summary, the Middle East/East route reported had 44 voyages in September, 68 October and a decrease of 1 to 67 in November. For the Middle East/West route, September had 23, October 28 and same figure in November. Finally, the West Africa/East route had 51 in September, 58 October and additional of pone voyage in November to 69.
The above summary of the voyages across the three major routes in the months of September, October, and November indicate the exact picture of the year. Only the months of February and March had some impressive performance as noted earlier.
In summary, the VLCC tanker trade, just like any other market is influenced by the forces of demand and supply. Increase in demand results to increase in supply as the market tries to establish an equilibrium price. Consequently, fall in the demand also results in the fall of prices. However, the tanker trade is also influenced by other economic factors that directly or indirectly impact the consumer behavior. There is no doubt the economic regression in 2009 significantly affected the oil market and since then the industry is trying to recover. The trade reports in 2017 indicate this recovery attempt even though the market performed dismally.
References
(2017). Tankers Shippers and Trader. Anfield: Reviera.
Alizadeh, A., & Talley, W. K. (2011). Vessel and voyage determinants of tanker freight rates and contract times. Transport Policy, 18(5),, 665-675.
Jaffe, A. M., & Soligo, R. (2007). The international oil companies.
Lun, Y. V., Hilmola, O.-P., Goulielmos, A. M., Lai, K.-h., & Cheng, T. E. (2013). The tanker shipping market.” Oil transport management. London: Springer.
Maritime News. (2017, Novemebr 17). Tanker Earnings to Remain Low in 2018 amid Oversupply. Retrieved April 13, 2018, from World Maritime News: https://worldmaritimenews.com/archives/235116/tanker-earnings-to-remain-low-in-2018-amid-oversupply/
Merikas, A. G., A. A., Polemis, D., & Triantafyllou, A. (2014). The economics of concentration in shipping: Consequences for the VLCC tanker sector. Maritime Economics & Logistics, 16(1), 92-110.
Singleton, K. J. (2008). Investor flows and the 2008 boom/bust in oil prices. Management Science, 60(2), 300-318.
Zacharioudakis, P. G., & Lyridis, D. V. (2011). Exploring tanker market elasticity with respect to oil production using FORESIM. Advances In Maritime Logistics And Supply Chain Systems , 297-315.