According to Poten & Partners' latest weekly report, "historically, these two markets have tended to move in tandem since both vessel sizes service West African export requirements. Because cargoes in West Africa are generally stemmed in one million barrel parcels, charterers can arbitrage the differential in freight rates by co-loading two cargoes on one VLCC instead of chartering two Suezmaxes. As a result, strong VLCC rates have allowed for upward movements in Suezmax rates. While this current uptick in freight rates might merely be seasonally-lived, longer-term positives exist for this semi-slighted sector. Two additional factors helping to drive the Suezmax market outside of the general correlation with VLCCs are the growth in exports from West Africa to the East and a potential balancing of the orderbook against possible demolition candidates aged 15 years or older that is likely to take place in the next few years. In theory, the possibility of crude exports from the US also presents an intriguing theoretical opportunity for the segment in two distinct ways", Poten noted.
It added that the correlation between the Suezmax voyage, WAF-USAC, and the benchmark VLCC voyage, AG-East, can clearly be seen in the past three years, most noticeably in 2013. "The most apparent hit to Suezmax demand occurred when US domestic crude oil production backed out import requirements for West African grades. However, benchmark crude oil pricing dynamics have helped to offset this decline by increasing the appeal of West African crude oil to Indian refiners. The distance from West Africa to India is 2,000 nm longer than the TD5 legacy voyage the US Atlantic coast. As shown in the chart below, the count of cargoes headed to the East has risen from less than six per month in 2012 to a total of 15 in November 2013", the shipbroker said.
According to Poten, "the silver lining for Suezmaxes in the US crude oil production could develop if export restrictions are lifted. US inland grades of crude currently trade at a discount to WTI, due in part to transportation costs required to bring them to market. However, if US crude exports are authorized, this discount will be reduced as pipelines will feed inland crudes to the US Gulf coast for export more efficiently and the Brent-WTI spread will narrow. If the spread narrows and the WTI discount erodes, the additional cost of rail transportation may make seaborne grades from West Africa an attractive option for US refiners. A surge of cargoes bound for the US Atlantic coast was seen in July of this year, when the Brent-WTI spread narrowed. Additionally, due to the limited number of ports in the US Gulf that can handle VLCCs, any exports would likely move via Suezmax or Aframax tonnage, potentially supplying demand for both segments", it mentioned.
"From a supply perspective, the best news for existing Suezmax owners is the small size of the orderbook relative to the number of vessels 15 years or older. The current orderbook amounts to a little more than 10% of the 440 ship fleet; however, 13% of the fleet is 15 years or older suggesting that there may be slight contraction in the fleet over the next several years.
Despite the firming of broader demand fundamentals short-term, the Suezmax sector still faces more wild cards that other sectors in the years ahead. The development of new trade patterns, particularly those with longer voyages, has led to unpredictable regional availability; bucking monthly and seasonal trends for supply and demand. At the end of the day it will be the moderation of tonnage supply will be the most important factor in supporting rates going forward", Poten concluded.