Soaring Tanker Freight Rates Amid Plummeting Oil Prices

Increased Interest in Oil Storage Tankers for Crude Oil Arbitrage After COVID-19 Easing
Saudi Arabia and Russia Compete in Production Increase, Leasing Up Tankers

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Despite the decrease in oil demand due to the COVID-19 pandemic and the oil production competition between Saudi Arabia and Russia, shipping freight rates have surprisingly risen. This is the result of demand surging to secure oil in advance, mainly by Saudi Arabia, in anticipation that international oil prices will recover once the COVID-19 situation stabilizes. Even oil tankers are being drawn into oil stockpiling.

On the 12th (local time), the U.S. business magazine Forbes reported, citing sources, that the freight rate for Very Large Crude Carriers (VLCCs) capable of carrying more than 2 million barrels of crude oil in the U.S. rose from about $16,000 at the beginning of last month to $42,000 this week. Another foreign media outlet also reported that the daily freight rate for oil tankers traveling the Middle East to Far East route surged 3.7 times from $28,000 last week to $105,000. The Baltic Dirty Tanker Index (BDTI), which shows fluctuations in international oil tanker freight rates, rose 47.3% from 796 at the beginning of this month to 1,173 on the 12th.

Until last month, tanker freight rates had plummeted due to concerns over declining oil demand. The average daily freight rate for oil tankers traveling the Middle East to Far East route was around $100,000 in January but dropped to about $20,000 in February. Earlier, the International Energy Agency (IEA) forecasted that global oil demand could decrease by 90,000 barrels per day this year due to the impact of COVID-19, and the Organization of the Petroleum Exporting Countries (OPEC) also predicted that global oil demand would not increase compared to the previous year.

The unexpected short-term rebound in tanker freight rates is analyzed to be due to expectations of the 'contango' effect appearing in the international oil market. Contango refers to a situation where futures prices are higher than spot prices. As a result, oil brokers are rushing to lease tankers to buy large quantities of cheap oil for storage. The expectation is that profits will be made when international oil prices recover after the COVID-19 situation calms down, which is increasing demand for oil tankers.

Oil prices continue to fall sharply due to decreased oil demand caused by COVID-19 and production competition among oil-producing countries. According to foreign media such as CNBC, on this day at the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude oil closed at $31.50 per barrel, down $1.48 (4.5%). Brent crude for May delivery on the London ICE Futures Exchange also fell 8.16% from the previous day to $32.87, barely holding the $30 level. Additionally, restrictions on air routes in Europe and the U.S. have raised concerns about reduced demand for jet fuel.

Some analysts argue that the price increase is not purely due to demand aimed at the contango effect but is also driven by Saudi Arabia leasing a large number of oil storage tankers to compete with Russia in oil production. According to the British Lloyd's List, Saudi state-owned shipping company Bahri recently leased nine VLCCs at once, with the daily freight rate for one of them reaching $197,500. Bahri is reportedly leasing out tankers at high prices regardless of the market price whenever available, causing overall freight rates to soar. If the production competition between the two countries intensifies further, tanker freight rates are expected to soar regardless of oil price trends.

Global refining companies and oil brokerage firms are on high alert to secure VLCCs. International credit rating agency S&P Global, citing tanker brokers, said that global oil companies such as Shell and the world's largest oil brokerage firm, Dutch Vitol, have been persistently inquiring about VLCC leases due to the sudden rise in freight rates.

This content was produced with the assistance of AI translation services.