The Asian VLCC market has been facing unrelenting downwards pressure in recent weeks, with rates for the benchmark AG/Japan route plunging by w15.5 points m-o-m to w54.5 as of today. This translates into $7.99/mt, which is 44% lower than that of the year before. A smaller December loading program in the AG as well as build-up of tonnage in key loading areas weighed heavily on market sentiment, dashing owners’ hopes of a winter spike.
Lower cargo demand can be attributed to an expected ease in Chinese crude imports in December as the powerhouse loses its once voracious appetite for stockpiling on high crude prices and some independent refiners run short of import quotas. China’s October crude imports hit a 13-month low at 7.3 mmb/d as the backwardated structure in crude incentivized the drawdown of commercial oil inventories. According to the official Xinhua news agency, Chinese crude commercial stocks plummeted by 9.5% m-o-m to a multi-year low of 197.6 mmb at end-October as refiners ramped up crude runs to the second-highest level on record of 11.26 mmb/d. Looking ahead, we may see a slight rebound in January crude imports on the back of higher crude import quotas for independent refiners in 2018. This will provide some temporary relief for the struggling crude tanker market, which continues to face delays in any substantial recovery.
The recent extension of the ongoing OPEC production cuts until end-2018 does not bode well for the VLCC market, which has seen a fall of around 10% in ex-AG fixtures per month amidst rapid fleet growth of 7.5% this year. The massive drop in floating storage this year has also released older units into the trading fleet, further lengthening vessel supply. While emerging long-haul trades from the Americas to Asia and subsequent growth in ton-mile demand remain the silver lining in the cloud, cargoes continue to move on an opportunistic basis. Rising scrap prices may also encourage more tanker scrapping and help to alleviate the current supply glut.