VLCC outlook: Sanctions, ‘pond full of black swans’ and China downside risk
Hope is rising that sanctions will force more crude cargoes to mainstream VLCCs in 2025
After a disappointing few years, there’s renewed optimism on VLCC rates in 2025. The caveat is that Chinese demand needs to rebound for upside from heightened sanctions to truly pay off
VERY large crude carriers begin 2025 where they left off in the second half of last year, with unexciting spot rates that are weaker than expected. But the new year brings new catalysts and fresh hopes for a rebound.
“VLCCs haven’t had their moment in the past three years. In 2022, 2023 and 2024, they’ve been underperformers,” said Lois Zabrocky, chief executive of International Seaways, during a Capital Link online forum on Thursday. “We should look for the big ships to do better” in 2025, she said.
New drivers are emerging on the geopolitical front. “The whole pond is full of black swans,” said Zabrocky.
Upside potential from sanctions in 2025
China’s Shandong Port Group announced Tuesday that it will cease handling US-sanctioned tankers. According to data from Vortexa and Lloyd’s List Intelligence, at least eight sanctioned VLCCs have called at ports in Shangdong since December.
Also on Tuesday, the US Defense Department put Cosco, an important VLCC operator, on its list of companies with Chinese military ties.
VLCC owners and investors are also expecting further sanctions from the Office of Foreign Assets Control in the waning days of the Biden administration, adding to the flurry of tanker designations last year. Reuters reported on Monday that Ofac will shortly sanction “over 100 tankers” that carry Russian crude.
That may be just a taste of things to come when Donald Trump assumes the US presidency on January 20, with expectations that he will tighten the screws on Iranian crude exports.
Zabrocky said of the Shandong ban, “Our guys in the Tankers International pool say there are already a few VLCCs diverting to Singapore. The United States can decide what it wants for sanctions, and now it seems like China is paying attention.”
Regarding the Cosco designation, she said, “Cosco is huge, with over 1,000 vessels. They are running 55 VLCCs in combination with some western owners in a pool and they have western ships on time charters. We’re watching closely to see how this develops and evolves.
“There is no prohibition against doing business with Cosco, and yet, some American oil companies are going to take a very close look and say, ‘Well, what does this mean? When I want to export my barrels out of the US Gulf, what vessels am I going to use?’”
Expectations for further sanctions on Russian crude transport in the final days of the Biden administration come at a time when Russian crude exports have already been falling. Russian crude is transported on aframaxes and suezmaxes; the lower the volumes on those vessels to India and China, the better for VLCC demand.
“At the moment, what we see is a tightening on Russia flows,” said Zabrocky. “Russia exported less oil in the fourth quarter than it had previously. We’re seeing fewer Russian barrels on the water.” She speculated that this could be due to infrastructure damage from Ukrainian attacks or Russia’s lack of reinvestment in oil fields and infrastructure.
This year offers Western governments an opportunity to tighten sanctions on Russia and Iran with less of concern that oil prices will spike, due to the expected rise in non-Opec production as well as the ability of Saudi Arabia to ramp up output.
According to Zabrocky, “It seems to me, politically, that the world likes to keep oil flowing to keep oil prices in a certain range where it doesn’t create economic distress. In 2025, we will have more oil supply. We should have over 1m barrels per day in demand growth but we’ve got more than enough [supply]. Non-Opec supply should grow by over 1.5m bpd this year, and Opec may want to come back on the market [with higher exports].”
This newly available supply from non-sanctioned countries could be particularly important — and advantageous to mainstream VLCC owners — with the arrival of Trump and the expected heightened pressure on Iran.
“The Ofac list continues to go up and we don’t even have Trump in office yet,” said Zabrocky.
Robert Bugbee, president of product carrier owner Scorpio Tankers, said during a Capital Link online forum on Tuesday, “Biden has opened the door for Trump to storm through when he becomes president. I think there’s a pretty good chance that Trump will reduce Iran’s exports to where he had them before, especially after the Iranians tried to assassinate him.
“The last time Trump was president, Iran’s exports were 10%-15% of what they’re doing now. And when you see the announcement on Cosco, I think that’s the tip of the iceberg of what’s coming,” said Bugbee.
Ship brokerage BRS said of expected Trump pressure on Iran, “If Iranian crude exports plunge, this will “organically” create space for other Opec-plus barrels, most of which should come from the Middle East. This will not lead to a rise in oil on the water, but it will see “grey tanker” demand replaced with mainstream tanker demand, something which should support hire rates, especially for VLCCs in the Middle East.”
Concerns persist on Chinese demand
All of these geopolitical catalysts sound promising for VLCCs, particularly given low supply growth. According to Clarksons, there are only five VLCC newbuildings scheduled for delivery this year versus an on-the-water fleet of 906, including around 20% currently under sanctions.
The big caveat, however, is Chinese demand, which has an outsized impact on VLCC rates.
China’s Unipec is by far the world’s largest spot charterer of crude cargoes. According to Poten & Partners, Unipec handled 15% of dirty spot cargo volumes reported in 2024. No other charterer accounted for more than 4%.
Unipec’s 2H24 spot volumes fell to 93.4m tonnes, the lowest in at least six years. That was down 6% sequentially from 1H24 and down 21% from 2H19, prior to the pandemic.
The decline versus 2019 is likely to be in part due to the shift of Chinese sourcing toward dark fleet* tankers in sanctioned trades. However, data from Vortexa, which does include movements of sanctioned tankers, also showed a decline.
Vortexa data, derived from ship movements, showed that Chinese imports of crude and condensate from all sources fell 4% in 2024 versus 2023.
VLCC spot rates have moved up recently, but remain below where they were in both January 2023 and January 2024.
The Baltic Exchange put Middle East-to-China VLCC spot rates at Worldscale 47 on Thursday, up 7% from the day before and up 20% from the recent low reached in mid-December. However, current rates remain at the lower end of the range seen over the past two years, despite all the talk of sanctions upside.
The big question for VLCC rates in 2025 is: Will a sanctions-driven shift in cargoes to mainstream VLCCs — assuming it happens — be enough to offset a decline in demand, should China continue to disappoint?
* Lloyd’s List defines a tanker as part of the dark fleet if it is aged 15 years or over, anonymously owned and/or has a corporate structure designed to obfuscate beneficial ownership discovery, solely deployed in sanctioned oil trades, and engaged in one or more of the deceptive shipping practices outlined in US State Department guidance issued in May 2020. The figures exclude tankers tracked to government-controlled shipping entities such as Russia’s Sovcomflot, or Iran’s National Iranian Tanker Co, and those already sanctioned.
Download our explainer on the different risk profiles of the dark fleet here
