THE very large crude carrier business will take whatever good news it can get in the dog days of summer. As brokerage Fearnleys put it this week: “When you are at the bottom of the hill, the only way is up.”

There was good news on Thursday, with rates suddenly surging well above recent lows.

“VLCC rates have jumped,” said Clarksons Securities analyst Frode Morkedal. “Rates have now recovered back to levels last seen in early June, with owners hoping to maintain momentum as fixing of September cargoes starts.” 

The Baltic Exchange’s TD3C index for Middle East Gulf to China time charter equivalent rates increased to $36,999 per day on Thursday, up 47% from the day before. The TD3C Worldscale index rose 23% versus Wednesday, to WS59.25.

The caveat of the abrupt upswing: VLCC rates are extremely volatile and the rise was off a low base. This is the second bounce in the past month — and the first one didn’t hold.

VLCC rates hit seasonal lows in July, rebounded toward the end of that month, then sank back again in the first half of August.

“Any recovery will likely be fragile given broader market uncertainties,” commented Breakwave Advisors on Tuesday, prior to the latest spike. “The market remains shaky, with key indicators still under pressure.”

Concerns on Chinese demand

Much of the broader market uncertainty relates to the most important destination for VLCC cargoes: China.

“China’s crude oil imports in July saw a notable downturn, reaching their lowest level since September 2022,” said Breakwave Advisors. According to brokerage BRS, Chinese crude imports in the first seven months of 2024 were down 3% year on year.

DHT chief executive Svein Moxnes Harfjeld acknowledged on a conference call Tuesday that China weakness was pressuring rates on top of normal seasonality.

He said heavy trucking in China is shifting more toward use as liquefied natural gas as fuel, a negative for oil demand. On the positive side, China’s petrochemical sector is poised for “meaningful growth” as a result of new refining capacity.

“The new refining capacity coming on in China has around 80% pet-chem output, of which the predominant part is crude oil-based. But this is not happening right now. That is something you will see developing over the next 12 to 24 months.

“So, there is some change in what the oil is being used for, and the negative components have come earlier than the positive components, which has probably amplified the seasonality this summer.”

BRS said in a report on Monday that Chinese refineries are facing “poor margins and lacklustre demand, with diesel demand notably hit by slowing industrial activity”.

It noted that the startup of the 400,000-barrel per day Yulong refinery has been pushed back until the fourth quarter, and the 120,000-bpd expansion of CNOOC’s Ningbo refinery has been delayed until 2025.

BRS expects the Chinese refining sector to “remain extremely difficult for the foreseeable future, which suggests that both margins and processing rates will remain lower for longer. In turn, it is difficult to envisage a strong rebound in Chinese crude imports over the coming months unless international prices move significantly lower, which would incentivise the replenishment of inventories.

“Considering that China’s anemic demand for crude has weighed heavily on crude tanker rates — especially on VLCC liftings from the Middle East — this suggests there could be some hard months ahead for owners,” wrote BRS.

Opec production cuts could persist

Production cuts by Opec+ have been yet another headwind for VLCC rates. If Chinese weakness persists, VLCC rate pressure from these cuts could extend further.

According to Evercore ISI analyst Jon Chappell, “China imports have been very soft of late, and with a wobbly global consumer, the long-anticipated unwind of Opec production cuts may not come as soon or as meaningfully as originally projected.”

During the DHT call, Jefferies analyst Omar Nokta commented, “Maybe we’re looking at a situation where flat production from Opec is a best case and they’re constantly having to cut, not necessarily because of demand, but because you have so much non-Opec production growth.”

Nokta asked Harfjeld how VLCCs would fare if OPEC volumes were flat to down over the next six to 18 months, while Atlantic volumes grew.

Harfjeld maintained that it would be a positive for VLCCs. “Atlantic barrels to Asia are truly a VLCC business. It’s impossible for suezmaxes to compete on that.

“I think if Opec at some point decides to release barrels to the market, it would be because there is true evidence of demand growth, so those barrels can come to the market without necessarily rocking the oil price.

“I always think that Opec — and Saudi Arabia in particular — has a clear objective of managing price more than anything. That is precious to them.”