• VLCC Rates Jump Amid Geopolitical Turmoil but Demand Risks Remain – The VLCC market in the Arabian Gulf (AG) experienced two distinct halves at the beginning of October. An initially subdued freight market mainly due to lower activity during holidays in the Far East, with available cargoes attracting numerous offers, resulted in some fixed deals being concluded below previous levels and market sentiment begun to weaken. However, this slow momentum changed mid-week as renewed geopolitical tensions in the Middle East increased uncertainty. As a result, many shipowners were reluctant to offer AG cargoes, which led to a lower availability of tonnage. This shortage of supply allowed shipowners to push spot rates up in a matter of days. In West Africa (WAF), the VLCC market showed signs of recovery after the recent downturn. The return of Eastern charterers with numerous cargoes for late October and early November helped to clear out much of the early tonnage. This tightening of supply combined with the strength of the US Gulf market bolstered rates while a solid flow of inquiries for North Europe routes also contributed to the improved sentiment. Looking ahead, the crude freight market faces continued complexity as geopolitical tensions remain heightened amid concerns over stability in the Middle East. Such a climate of uncertainty increases the likelihood of freight rates rising further in the coming days/weeks, especially with signs of tightening tonnage availability. The current dynamics favor shipowners, who may push rates even higher especially during a seasonally strong period.
• Numerous Scenarios for Oil Markets as Middle East are Reaching a Boling Point – The complex relationships and possible scenarios on a progressively tense situation in the Middle East is causing considerable nervousness in the oil markets including tankers. The future developments are difficult to predict and range from mild price impact all the way to significant disruptions in oil flows that could lead to major price dislocations across the energy spectrum. Despite significant excess production capacity (some ~5mpbd), the logistics of getting such crude into the global markets is challenging and would require some cooperation from Iran that stands in the midst of the current turmoil, a development that is not a certainty. With the news flow changing by the hour, it is quite difficult to make any predictions with a reasonable degree of certainly. The reality is that uncertainty has a cost, which is reflected in both oil as well as freight prices. From one hand, the bad scenarios increasingly seem real and has now been discussed more and more. On the other hand, we see such scenarios as extreme when we include the economic incentives for each player. Given current oil and freight prices, the risk-reward of holding long exposure in those markets appears reasonable, as we believe recent escalation in the Middle East is the worst we have seen in many decades and warrant more caution that previous clashes.
• Our Long-term View – The tanker market is recovering from a long period of staggered rates as the growth in new vessel supply shrinks while oil demand is recovering in line with the global economy. A historically low orderbook combined with favorable demand fundamentals should continue to support increased spot rate volatility, which combined with the ongoing geopolitical turmoil, should support freight rates in the medium to long term.
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