In the fourth quarter, the Israel-Hamas conflict led to increased geopolitical tensions, especially within the oil sector, reshaping dynamics within the industry. After the end of September, freight rates firmed in October, influenced notably by Russia. Based on a Bloomberg study, Russia successfully sold a significant volume of crude oil exports surpassing the $60/barrel price threshold. The effectiveness of sanctions seems to have waned, potentially because of inadequate oversight and enforcement of the oil price restriction policy.
Shipping stakeholders are closely monitoring the evolution of crude oil freight rates as the year draws to a close. An important question arises: Which ship size segment has benefited the most from the current geopolitical events? Notably, the Suezmax and Aframax segments experienced substantial gains mainly driven by an unaffected flow of Russian crude oil trading, while the VLCC showed signs of recovery, primarily driven by increased Chinese crude oil imports to meet domestic demand. At the same time, the US crude oil market saw a significant increase in exports, reflecting a dynamic shift in global oil trading patterns. South Korea in particular emerged as one of the most important destinations for US crude oil exports, surpassing the volume of Chinese crude oil imports.
In examining the oil demand growth forecasts, which significantly influence crude oil freight revenue development, the IEA's December report estimated world oil demand is on track to rise 2.3 mb/d to 101.7 mb/d in 2023, but this masks the impact of a further weakening of the macroeconomic climate. Back in its monthly report of November, the IEA forecast was for a world oil demand rise to 2.4 million barrels per day (mb/d). It is worth noting that China is responsible for 80% of the expected increase in global demand this year. This adjustment is a sign of the potential impact of challenging global economic conditions and advances in energy efficiency on consumption.
For the coming year, the International Energy Agency (IEA) forecasts a slowdown in supply growth among non-OPEC+ oil producers, with an expected increase of 1.2 million barrels per day in 2024. This represents a slowdown from the current year's growth of 2.2 million barrels per day, driven primarily by the United States. Combined with the decline in demand, these factors could pose a challenge for OPEC+.
In contrast to the IEA's estimates for demand growth, OPEC maintained its forecast for global oil demand growth in 2023 at 2.5 million barrels per day in its monthly report. Its forecast for 2024 also remained unchanged from the previous month at 2.25 million barrels per day. Although the difference between the International Energy Agency's (IEA) and OPEC's forecasts for demand growth in 2024 has narrowed slightly, it still stands at 1.15 million barrels per day.
In the following sections, we will describe the most important trends in crude oil tanker shipping. It is worth noting that the geopolitical changes facing the tanker shipping industry coincide with the current energy transition, where the industry is striving to get in line with the upcoming net zero targets. Nevertheless, the tanker industry faces a variety of challenges, particularly in developing countries where infrastructure is not yet prepared for a seamless transition to a net zero target.
Crude Freight Market Trends
Crude oil freight market experienced a sudden burst following the end of the third quarter that coincided with increase of Russian volumes, US exports and the outbreak of tensions between Israel and Hamas. As can be seen in Image 1, crude oil freight rates recorded a significant increase on October 20, 2023, both on a monthly and annual basis. The increase was particularly impressive on the Suezmax-Wafr-Cont route as well as on the Aframax-USG/Med and Aframax-Cross-Mediteranean routes.
The crude oil tanker market remains vulnerable to heightened economic and geopolitical risks, and following the attacks in the Red Sea, a new wave of fears about the rise in oil prices is emerging. However, an important factor supporting the positive momentum of crude oil freight prices is also the problem of undersupply. Together with the effects of geopolitical events, this undersupply is creating a robust market outlook. For both the current and the coming year, there are clear signs that demand will exceed supply, as net fleet growth in the crude oil tanker segment is impressively low compared to the previous year.
Fears that the war between Israel and Hamas could lead to a disruption in the supply of crude oil have not yet materialised. However, the recent escalation of attacks on the Red Sea and the Suez crisis threatening the world economy pose a major challenge for the development of crude oil flows with market prices on the Suez-Wafr continent showing increasing momentum. The Egyptian Suez Canal Authority has already expressed its vigilance regarding the situation and several well-known shipping lines are reportedly avoiding the routes near Yemen. In addition, it's noteworthy that the U.S. sanctions levied on Venezuela in late October are expected to have a minimal effect on supply. This is because reviving production in Venezuela's struggling oil sector necessitates both time and substantial investment.
Looking at the latest development of freight market trends with a focus on the Aframax vessel class (Image 2), it is clear that sentiment on the Atlantic market is weakening noticeably towards the end of the year. In contrast, the Eastern market is characterised by continued firmness. The Mediterranean market in particular is subject to increased downward pressure, which is closely linked to the prevailing sentiment on the USG freight market.
Among the larger crude oil tankers, prices for VLCC MEG China were revised significantly downwards and fell below the 60 WS mark. This is in stark contrast to the data from the beginning of November, which showed the highest level since the end of June and approached the 70 WS mark. At the same time, Suezmax Wafr-Cont rates have been consistently well below the 100 WS threshold since mid-November. In the Aframax segment, the USG market initially remained at a level of around 200 WS in mid-November, only to fall to a weaker level of 160 WS by mid-December. The question remains whether this similar weakness will continue at the start of the new year, depending on factors such as the Russian oil price cap on Urals crude sales below $60/barrel and the continued flow of crude from the West to the East.
Crude Oil Flows
Despite several rounds of announced OPEC oil production cuts since the end of the fourth quarter of 2022, the crude oil market remains well supplied, while Saudi Arabia, Russia and other OPEC members agreed in November to suspend cuts until the end of the first quarter of next year. Looking at the monthly volumes of Russian crude oil supplies, in image 3, October and November ended with a strong Chinese appetite for Russian crude oil, with an annual increase of 23% in October and 17% in November, while August and September held a decreasing trend from the peaks recorded in May, June and July.
A look at the landscape of crude oil exports from the United States shows a remarkable increase in supply volume, with Korea in particular overtaking China. Underscoring this trend, the data in Image 4 for October shows a remarkable 33% year-on-year increase in Korean crude oil imports from the U.S., while November's figures maintained the record pace of the previous month. Interestingly, this year's trend in US crude oil exports has surpassed the monthly totals of the previous two years, and December is on the verge of ending in the same range.
At the end of the final quarter of the year, there is a discernible trend indicating that crude oil flows are poised to surpass the levels witnessed during the summer season. Notably, the voluntary oil production cuts implemented by Saudi Arabia and Russia have yet to exert a negative influence on the overall volume of shipments. Demand remains robust in the East, with China and India continuing to source from Russia, and Korea displaying a notable preference for U.S. crude. Meanwhile, November has provided strong signals of a heightened Chinese appetite for Iranian crude oil, the persistence of which remains uncertain as we approach the year-end.
Tonne days and Market Rates
Analysing the most recent correlation between market prices and the growth of the tonne days, it's noticeable that the dirty Suezmax tonne days increased continuously from October and peaked at the end of the month. At the end of November, Suezmax Wafrcontinent rates fell to new lows, with tonne days growth being further revised downwards. In mid- December, the slowdown from the end of the previous month continued, with the time charter equivalent (TD20-TCE) at around $34,000/day, but still a remarkable improvement from the end of September when it was struggling to get above $20,000/day. (see image 5)
In the VLCC segment, a positive shift in market sentiment became apparent from mid-October, although the momentum remained notably weaker compared to the peaks witnessed in mid-March when TD3C-TCE neared $90k/day (refer to image 5). While the trajectory of VLCC tonne days growth from the AG to FE has not firmly stabilised, it appears that the VLCC Atlantic market is struggling to find a more robust sentiment for December, with an indication of a slight increase in demand growth, however weakness prevails, while data for a similar period in 2022 indicated firmer levels of both rates and demand.
As December draws to a close and the fourth quarter concludes, there seems to be a generally seamless movement of crude oil across various destinations. The East, in particular, holds a pivotal influence over freight rates and the directional patterns of shipments originating from the Russian Federation, Saudi Arabia, and the United States. Recent geopolitical tensions surrounding Israel-Hamas and concerns about oil supply disruptions have begun to subside. However, the persistent challenge for establishing a more robust momentum in freight rates lies in the trajectory of demand, coupled with the performance of the Asian economy and the fluctuation in crude oil prices.
For a more comprehensive analysis of oil flows, market prices and demand, you can use the Signal Ocean Platform for historical trends and the visualisation of the current landscape.