Prior to the US sanctioning two Russian oil majors, the crude future market in 2026 had flipped to a “Contango” pricing structure – one of the key fundamental support factors for VLCC demand that McQuilling first introduced back in Aug 2024.  Although the market temporarily reverted to backwardation following US sanctions pushing front prices higher, a weakening US dollar amid federal fund rate cuts and potential QE incentivizing rising OPEC+ production is expected to push crude futures back to contango.  Global crude inventory for commercial and strategic reserves is expected to simultaneously ramp-up, including SPR in US and China.  According to Reuters, China’s state-owned oil companies including Sinopec and CNOOC will add at least 169 million barrels of storages by the end of 2026; of that, 37 million barrels has already been added. US Department of Energy also appropriated US $171 million on Oct 21st to begin refilling the US SPR, likely suggesting higher imports from the Middle East.  The increase in imports will expand the US’s crude balance, unleashing available lighter grades for exports to mainly East of Suez as one approach to offset the trade imbalance. Considering both crude flows are dominated by VLCCs, we maintain our view for a firm VLCC market into 2026.

Following the brief implementation of China’s retaliatory port fees to USTR Section 301 actions, news indicated port delays and a large increase in crude volumes at sea, or tankers being used for floating storage. This was short-lived however, with the port fees on both sides now suspended for 1 year under the US-China agreement. Looking forward, our arb-model based on CME’s brent futures as of Oct 14th indicates the current contango structure is not enough to support commercial floating storage, as time charter now in the owners’ market. Unless Saudi Arabia decides to start another price war (unlikely), we do not foresee a commercial-driven VLCC floating storage buildup is viable in the next 12 months.

Fig. 1: VLCC Floating Storage Demand                                                         Fig. 2: Brent Futures Settlement
 

Source: McQuilling Services, AIS Tracking, CME