The freight rates that large oil carriers charge on certain routes have plunged about 30% since the beginning of the year. The reason is twofold: There are suddenly more tankers looking for work and less demand for their services because of OPEC’s production cut.
The benchmark Worldscale rate for very large crude carrier tankers in the 300,000-ton class has sharply fallen to around WS65 at present — the lowest point since November — for a voyage from the Middle East to the Far East. Less than three weeks ago, the voyage cost over WS90.
Worldscale rates are expressed as a percentage of the benchmark price.
In late November, OPEC members agreed to cut oil production for the first time in eight years. Ten days later, Russia and other non-OPEC oil producers followed suit. The historic deal helped temporarily boost oil demand from large consumers, such as China and India, who tried to import oil from the Middle East before the production cuts began, according to a shipbroker. But the oil export surge from the Middle East was brief.
Less demand, more supply
At the same time, there are more boats out there to carry oil. More overage ships as well as vessels that have completed repairs and inspections are available, although demand for them is usually weaker than that for newer carriers.
The Worldscale rate jumped in December, largely due to the large number of spot contracts for the October-December quarter — up as much as 10% from a year earlier, according to one estimate.
Crude oil shipments from Western African nations, including OPEC-member Nigeria, which is exempted from the production cut, were also high. The great distance these boats have to travel to get oil to Asia can limit the number of contracts they can fulfill. This has a market-tightening effect.
Meanwhile, China appears to have tried to secure large amounts of crude ahead of its long string of Lunar New Year holidays beginning Jan. 28. In addition, bad weather kept some vessels at Chinese ports, according to a major Japanese shipper. This also tightened the market.
But with the market having since regained some equilibrium, and with OPEC ready to slow the flow, demand of oil transport could decline.
This could all change should speculation arise that oil prices are about to surge. Oil tanker rates could be volatile this year, depending on the supply-demand balance. Many market participants, including shipbrokers, say the shipment volume in February should be scrutinized for signs of future changes.