The USG market shifts from Aframax to VLCC

Signal Maritime examines current trends in freight and oil flows for the Aframax USG market using Signal Ocean Data

The first quarter of the year ended, and in April there was a sudden drop in rates in the Aframax USG market, which drew attention to the reasons for this trend, as we can already observe the new pattern of oil flows from the Russian Pacific to Asian countries. We are already seeing a general increase in dirty tonne-miles as the U.S. is in the process of replacing Russian oil supplies for European countries. Back in October 2022, we saw an upswing in VLCC rates as the monthly volume of crude shipments from the U.S. to China and India increased significantly and rates shot up in line with demand growth (in tonne-days and miles). Not only did this trend not lose momentum, but it continued to strengthen with the role of the U.S. oil market in European energy demand. However, Aframax tankers appeared to lose their share of this change in the pattern of oil flows from the U.S. to Europe, while VLCC size gained ground, leading to a greater increase in tonne-days and miles.

In the following sections, we will use Signal Ocean data to show the evolution of rates, supply and demand in the U.S. market and make some comparisons between VLCC and Aframax tankers to show the possibilities for the future as we are in a period of complete oil supply transition, with global news highlighting the role of the U.S. oil market in Europe.

I. Market Rates - Aframax market USG

Looking at the trend in Aframax market rates USG/Med, we can see (image 1) the significant drop from the end of the first quarter to today, with the decline accelerating in the last three weeks. Signal assessments have shown a monthly decline of about 54% as of April 26, 2023, while the decline since the November peak is 73%. It remains to be seen whether today's slowdown will continue to the same extent as the increased supply of ships puts pressure on prices.

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II. Supply Market Trends

Over the past three months, the supply trend for the Aframax USG market has shown strong volatility, with an average increase of more than 70 vessels from mid-April, leading to a decline in market prices over several weeks through April 20. However, the trend of the last few days seemed to have halted the sharp acceleration in the number of vessels, resulting in a flat dynamic of rates at levels above 100 WS, but still well below the highs of 270 WS after mid-March. (Image 2).

III. Crude Oil Flows - USG to Europe

Recent developments in the supply of vessels in the Aframax USG market have led to uncertainties regarding the share of Aframax tankers in the oil trade to Europe, since in the past most Aframax cargoes loaded in the USG have gone to Europe. However, it must be said that there has been a shift from Aframax size to VLCC. Looking at the evolution of oil flows from the USG market to Europe, it is clear that VLCC vessels are now more involved in the oil trading from the USG market to Europe (image 3). March recorded the highest peak seen over the last three years for the US crude oil exports to Europe with the VLCC size topping on the other crude tanker vessel size categories.

As can be seen in Figure 4, the first quarter of this year ended with VLCC tanker size accounting for 39% of oil traded from the USG market to Europe compared to a 7% share in the same period last year, while Aframax tanker share declined to 31% from 65% in the first quarter of 2022. There appears to be limited potential for this ratio to change in Q2, with VLCC size continuing to take oil trade business from Aframax size and Aframax size share declining even further.

IV. Demand Ton Miles 

The increase in trade of VLCC oil from the United States has resulted in a tremendous increase in dirty ton-miles to historic highs. This trend is clearly evident for all destinations and for Europe as the global economy appears to need more crude oil imports (image 5). This upturn is expected to continue as global oil demand is in a strong recovery phase. According to the latest IEA report of March, global oil demand growth, after declining by 80 kb/d in 4Q22, is projected to accelerate significantly during 2023, from 710 kb/d in 1Q23 to 2.6 mb/d in 4Q23, while average annual growth is projected to slow from 2.3 mb/d in 2022 to 2 mb/d, with global oil demand reaching a record 102 mb/d.

The picture of VLCC ton-miles growth in the USG market is at odds with the case of Aframax ton-miles, where a sharp slowdown has been observed in all countries and in Europe, with limited expectations for an imminent change as VLCC tankers gained a dynamic presence.

Looking ahead, we can say that it seems to be a year for VLCC tankers as global energy demand recovers and it seems to be more affordable to transport the larger volumes of European oil with VLCC tankers instead of Aframax tankers. Meanwhile, Asian countries also need larger quantities of oil more quickly, and VLCC tankers are more ready for immediate deployment, while Aframax tankers are also used in the Black Sea and Mediterranean oil trades. In the longer term, the need for U.S. oil to fully replace Russian oil losses is more likely to shift to a VLCC market for the USG crude oil transportation, while Aframax tankers are likely to retain their lion's share of the Black Sea and Mediterranean trade.

It is interesting to underline the issue that the expectations for higher oil demand this year are mainly driven by the Chinese economy, and it seems to be more difficult to meet the trade demand with the VLCC tankers already deployed on the USG route, while in the past they were more on the AG to China route. The fierce competition among the crude tanker sizes in the USG to Europe route with Russian oil destined to China, creates challenges for the future in oil trade flows as Europe has already implemented a shift away from the Russian oil with the U.S. market on the pathway for gaining the top ranking in the replacement market. However, the increased oil demand of Chinese needs also to be served from the AG market, where vessels supply is already at significantly lower levels than a year ago. (image 7)

As we are already in the trade flow restructuring phase, it is foreseeable that more oil will need to be transported for AG and it is likely that Aframax and Suezmax tankers will take some significant shares of the VLCC size business. In addition, global demand for dirty ton-miles is expected to remain elevated due to recently estimated higher oil demand from the eastern and western regions. Therefore, we continue to look forward to the next trends in oil flows from the USG market with the existing increasing competition between VLCC and Aframax tankers to Europe and all other destinations.

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