THIS time it’s different. The current tanker boom does not compare to those preceding it, said Frontline chief executive Lars Barstad during a quarterly call on Friday.

He cited three coinciding factors that make it unique.

First, geopolitics — “a very politically laden market environment”. Second, unprecedented VLCC market concentration by a single owner-operator. And third, a much greater role of indexes than in the past.

The consequence, said Barstad, will be high volatility and violent rate moves ahead.

Evolution of VLCC freight market

“Frontline has been through many cycles, but the tanker markets do actually evolve over time. We would argue that we’ve never been in a cycle like this, where indices and freight derivatives weigh so heavily in the freight pricing mechanism,” said Barstad.

“This fuels violent moves as we proceed. For every $200,000 per day fixture that is done physically, there is an exponential number of contractual obligations triggered, giving this market a new dimension.”

Two decades ago, the Middle East Gulf-Asia market “had a lot of liquidity, but what has happened over the years is that more and more actors are using the index itself to price freight — doing floating contracts that price off the Baltic index quote, to the point where actually very little liquidity is transacted in the market.

“Over the last couple of weeks, the index has been relentlessly printing what is actually being done in the physical market, but it’s not like 10 cargoes are fixed a day. Two or three cargoes may be fixed per day, but the amount of pricing exposure around that quote is enormous, and this triggers an almost self-propelled move forward.”

Barstad compared the situation with the TD3C MEG-China VLCC index, “by some referred to as the Dow Jones of the freight markets”, to the evolution of oil commodity markets.

“For every physical barrel of Brent oil that is produced, it trades tenfold on paper. We’ve seen a bit of the same trend in freight. This becomes a problem if everybody is pricing their freight off an index that runs out of control.

“Then suddenly, you need to hedge, and you need to access the paper market. You end up with a very vibrant FFA [forward freight agreement] market, which every FFA broker today will testify to.

“And then you get this kind of ebb and flow out on the [futures] curve from panic to some sort of quiet until the panic kicks in again,” said Barstad.

VLCC spot rates still rising

The relentless rise of the VLCC indexes continued on Friday.

Spot rates are particularly strong out of the MEG, as market participants move to get cargoes through the Strait of Hormuz before any potential military action targeting Iran.

The Baltic’s MEG-Singapore index came in at $222,925 per day, with the TD3C at $218,154 per day.

The West Africa-China VLCC index was at $188,975 per day, the US Gulf index at $125,279 per day. The global average index was at $177,469 per day.

Asked how long these extremely elevated index levels could last, Barstad pointed to seasonal support in the spring followed by seasonal weakness in the summer.

“We’re going into the phase now where US refineries go into turnround, allowing for more barrels to be exported. So, there could be a few more months when we can actually sustain these rates, depending on how the flows work.

“But then there is the summer lull, and it’s almost inevitable. Whether it’s a summer low that moves from $200,000 per day to $100,000 per day [or lower], that is almost impossible to gauge.”

Barstad continued, “There is also one major importer in this market — China — and it has built an enormous amount of inventory over the years. It could, for any reason, choose to basically turn down the speed a little bit for a period of time, and this will also create volatility.”

Sinokor consolidation and US Gulf market

The US Gulf-China VLCC index is at its highest point since April 2020, yet it is far below the MEG indexes. More than two-thirds of US crude exports continue to flow to Europe and other Atlantic Basin buyers, not Asia, according to data from Vortexa.

Barstad said, “If the freight from the US Gulf to China is $18m, the charterer is exposed to $9 per barrel of freight, and the spread between the two oil markets needs to accommodate that. This has put some pressure on these arbs, and we’ve seen fairly little volume moving from the US to the Far East.

“But if oil needs to move, or when it needs to move, these differentials will just have to price to accommodate this spread.”

While it was not discussed on the Frontline call, any military action that restricts flows from the MEG to Asia would increase demand out of the US Gulf.

Another factor that could elevate freight in the US Gulf market: the VLCC consolidation play by South Korea’s Sinokor with the backing of Gianluigi Aponte’s MSC.

Signal Ocean analysed VLCCs that will be available to load in the US Gulf over the next 30 days. There are 21 VLCCs in position, with 14 or 67% controlled by Sinokor. Signal Ocean then filtered for only in-ballast and unfixed vessels, and that left only 13 VLCCs, 100% of which are controlled by Sinokor. 

“There is literally no tonnage replenishment in the Atlantic that is not Sinokor,” Signal Ocean chartering analyst Georgios Sakellariou told Lloyd’s List.

Commenting in general on the Sinokor consolidation play, Barstad said, “This really hasn’t been done in a material manner in the tanker markets for as long as I can remember. There was a parallel story in the mid-2000s involving a certain person from Taiwan, but that was in the dry bulk space.

“The key to his success in dry, and the potential key to the success of the Korean actor, is that you go into a market that is already fundamentally tight. Then you don’t need much to weigh it, to slow the supply side of capacity to get these violent moves.”

Asked why Frontline’s famously swashbuckling founder John Fredriksen hadn’t tried to corner the VLCC market in the past, Barstad said, “I’m not going to comment on why Mr. Fredriksen hasn’t looked at this, but the thing is, we are a publicly listed company. This is, of course, easier to do if you are a private entrepreneur willing to risk a substantial amount of money in such a game.”

Asked how Sinokor’s big bet could go awry, Barstad replied, “Where it can go wrong — and we’ve seen this before on a smaller scale — is that it ends up being like a game of chicken: who can hold out the longest.

“This makes me extremely excited about the months to come, because we’ll see some very interesting dynamics come into play. The one thing I’m 100% certain of is that there will be volatility.”

Others agree. Barstad said, “In discussions with market actors in recent weeks, a recurring phrase has been heard: ‘What a time to be alive’.”