VLCC Fleet Development Updates
Oct. 7, 2022
The cumulative net fleet growth for the VLCC segment is expected to reach 48 tankers by the end of 2022 according to our latest analysis (Figure 1). The past month we saw an additional net 6 VLCCs returning from floating storage, in addition to the 6 captured fleet additions. For the balance of the year, we expect deliveries to continue at a good pace (about 10 new VLCCs in Q4), on top of a high number of ships returning from drydock (net 4) as well as at least 4 rejoining the DPP trading fleet after delivering CPP products on their maiden voyage.
This development is likely to act as a ceiling to freight rate increases, with the latter primarily a result of volatility and the reshuffling of trade flows rather than balanced supply and demand dynamics. In fact, our analysis shows that the VLCC fleet is still oversupplied, with the current deletion estimates far lower than our projections at the beginning of the year. This significant change in demolition activity was brought forth by the conflict in Eastern Europe and the subsequent strengthening of earnings across all DPP and CPP sectors that disincentivized owners to send their (now well-earning) ships to the scrapyards.
Staying on the demolitions subject, we hold the view that it is unlikely to see any major changes going into 2023, with the caveat of a potential Iran or Venezuela sanctions removal. In our Mid-Year Update of our Tanker Market Outlook we developed a methodology to account for VLCCs that currently belong to the “ghost fleet”. Due to the inefficiencies around the utilization of this type of tonnage, we assign only about 70% of their total impact back to the trading fleet. Despite that, the reality is that these vessels are transporting cargoes that would under different circumstances be transported by conventional ships, but a sanctions removal scenario is almost certain to render a large proportion of it obsolete.
Finally, in terms of VLCC freight rates and earnings, we expect the market to remain firm in the short term but begin to face increasingly stronger headwinds during Q4 and for the first half of 2023. In the West, the scheduled end of the US SPR releases in November could result in significantly lower exports, slashing VLCC (and mid-sized tanker) demand, whereas in the East the recent decision from OPEC and allies to reduce output by 2 million b/d could remove some export cargoes from the market. On the positive side, with the forecasted net DPP fleet growth for 2023 only at 0.3%, we are likely to see the beginning of sustained market recovery by 2H of the year.
Figure 1 – VLCC Fleet Development - 2022
Source: McQuilling Services
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