BIGGER is often not better when it comes to tanker rates. Heading into the weaker summer period, very large crude carriers are heavily underperforming suezmaxes and aframaxes and the market is rife with pessimism on VLCC prospects for the months ahead.

Clarksons Securities put average non-eco, non-scrubber VLCC rates at $28,800 per day on Tuesday, down 46% month on month. VLCC rates are currently $14,700 per day below average suezmax rates and $21,200 per day below aframax rates.

Aframaxes and suezmaxes have continually benefitted from routing impacts of the Russia-Ukraine war and Red Sea crisis. VLCCs have not.

The Baltic Exchange TDC3 VLCC index, for voyages from the Middle East Gulf to China, fell to Worldscale 50.5 on Tuesday, its lowest point since October 11, 2023, and down 41% year on year.

“The VLCC market remains under persistent downward pressure amid oversupply and reduced demand…with sluggish performance in both the Atlantic and Pacific basins,” said Breakwave Advisors in a report on Tuesday.

Breakwave is the developer of the BWET exchange-traded fund that buys freight futures to track Middle East Gulf to China VLCC rates. That ETF, which was launched a year ago, is down 24% from mid-February highs.

US-listed public companies with high exposure to VLCC spot rates include Frontline, DHT, Euronav, International Seaways, and Okeanis Eco Tankers.

“As open tonnage becomes less of an issue for charterers and with limited signs of a rebound, the current softening trend should remain in place for the foreseeable future,” said Breakwave.

“In the Middle East Gulf, VLCC rates have experienced a significant decline due to reduced demand and increased competition for June last-decade cargoes. A similar quiet trend is seen in West Africa, with VLCC charterers able to chip away at last-done levels due to the increasing number of Eastern ballasters looking to escape the falling Arabian Gulf market.

“Overall, the summer blues for tanker owners are becoming a reality, and for the time being, a turnaround does not look imminent,” said Breakwave.

Brokerage Affinity said in a June 14 report, “VLCCs continue to hover around the bottom, with limited activity preventing any signs of a rebound for now. Charterers have worked well to sustain the downward pressure on rates by picking off owners, some with less desirable itineraries, to achieve less-than-last-done levels.

“It feels as though it will take some time for an uptick, and we will likely be stuck in the Worldscale 50-60 range for the foreseeable future.”

Low Opec+ output, low Chinese demand

The market is being pressured from both sides: The 23-nation Organisation of the Petroleum Exporting Countries-plus alliance announced earlier this month that voluntary cuts will be extended until October, while Chinese crude demand has been lacklustre.

“China’s oil demand growth has essentially stalled,” wrote Clarksons Securities analyst Frode Mørkedal on Monday. “This weak demand has been clearly visible in the tanker market.”

According to brokerage BRS, Chinese crude imports were down more than 8% year on year in May.

Mørkedal sees hope from China going forward, however, citing rising refining margins that should improve Chinese refinery operations in the coming months, “likely increasing chartering activity and supporting a recovery in VLCC spot rates”.

Some VLCCs switching to clean trades

For now, the market is so unexciting that several VLCCs are being “cleaned up” and temporarily placed in products trades. BRS reported that four VLCCs are being temporarily shifted to products service by international oil traders.

Switching from crude to clean trades is commonly seen in the aframax segment, but not in the larger tanker classes.

Previously, the use of VLCCs and suezmaxes for clean cargoes has centred on newbuildings, which load gasoil and diesel in Asia on their maiden voyages before switching to crude service after discharging in the Atlantic basin, a practice that has traditionally cut into LR2 product tanker demand.

According to BRS, the “curious case” of existing VLCCs and suezmaxes being cleaned up by traders this year, at a cost of over $1m per tank cleaning, is the consequence of the waning orderbook. One VLCC was delivered in January, with no more scheduled for the remainder of this year, and only six VLCCs are due for delivery in 2025.

Tanker executives, analysts and shipping investors constantly tout the “record low” orderbook as a sign of stronger market dynamics, yet as the current VLCC market confirms, constrained demand trumps constrained supply.