As of mid-March, the rates for chartering very large crude carriers (VLCCs) have significantly increased on a weekly basis after the recent crash in crude oil prices.
The rates peaked approximately 450% higher when compared to March 2019 for the Middle East Gulf to the US Gulf routes. Tanker rates had initially declined in February amid subdued demand for crude oil and petroleum products, following the outbreak of Covid-19.
However, after Saudi Arabia and Russia spat over crude production cuts, which led to an oil price crash and, subsequently, the tanker rates shot up from 6 March as oil producers and traders started enquiring for VLCCs to hold crude oil temporarily and wait for price recovery.
In the second week of March, there was a distinct spike in rates for VLCCs, originating from the Middle East and heading towards the US Gulf and the China routes.
The practice of leasing VLCCs for hoarding crude oil during downturns is quite common. It allows producers and traders to recover their production or procurement costs and, sometimes, even profit from the trade if the price recovery is within a short span.
However, the present scenario is unprecedented because, on one hand, crude oil demand has dropped drastically worldwide as industries and transportation have come to a near standstill situation. On the other hand, Saudi Arabia is preparing to raise its output and push more crude oil cargoes to global refineries.
The current downturn may last for a longer duration or until Saudi Arabia and Russia come to an agreement over production cuts. It would be very challenging for oil producers and traders to estimate the suitable level of freight rates and the holding period for achieving breakeven.