According to Worldscale reports, spot VLCC rates for shipping crude from the Persian Gulf to the Far East exceeded $200,000/day for the first time in this decade. It means that the cost of transporting the oil past 20% value of the oil that is exported in a shipment. The authorities discuss three different reasons for this price hike.
The essential impact comes from the American sanctions imposed on China and its shipping giant company COSCO due to oil exports from Iran. Since Iran and Venezuela were also sanctioned by the United States, importing oil from these countries was the official excuse for the American government to impose sanctions on China. Since the beginning of the sanctions in May 2019, there were several reports on that China was continuing importing crude oil from these countries through indirect ways. The United States government responded to these actions by extending the sanctions by adding COSCO Shipping to the list on September 23, 2009. A while after that, Exxon Mobile Corporation also banned the use of vessels linked to oil flows from Venezuela, which affected nearly 250 tankers. These decisions caused customers to replace ships, and since the number of supplies declined significantly in the region, the freight rates spiked rapidly.
The second reason is that Saudi Aramco’s statement that production will come back to normal levels. According to a VLCC owner, who responded to Platts, the Saudi announcement plus the increase in the supply of the U.S. crude, creating a massive demand on the refinery side. The refineries that tried to secure the ships for their winter supplies played a role in the shift of prices.
Among these reasons, one last important factor is the ships that anchored for the scrubber installation. Starting from 2020, the International Maritime Organization (IMO) will impose a new regulation that restricts shipping companies from using fuels that have high sulfur rates.
Up to now, ships have different solutions to comply with this rule. One of them is to use fuels that have low sulfur, and the second one is to install a system called scrubber to their tankers. Scrubbers will filter the harmful emissions and enable a ship to stay within the pollution limits. However, the installation of this system is not very easy. It takes up to 90 days for one tanker to complete the operation. Today, nearly 60 tankers are installing scrubbers at the ports and becoming unavailable for transportation. Eventually, their absence creates a positive impact on prices. As we get closer to 2020, more tankers are expected to put scrubbers; therefore, the number of available tankers may remain low in the following months as well. On the other hand, the tankers that do not have scrubbers also facing increasing costs. Depending on the region, shifting from high sulfur fuel oil to low sulfur fuel oil creates around $150 to $200 extra cost per tones to the shipowners. These additional costs also play a role in the more expensive contracts.
While these three reasons increase the cost of the oil shipments, China seeks to ask the U.S. to lift sanctions on its shipping companies. This week both parties will gather again to discuss the future of tariffs and sanctions between the two states. Last Friday, there was another negotiation between the high-level officials, and the Chinese government agreed to increase its agricultural product purchases from $16 billion to $40-$50 billion dollars. Additionally, they agree to purchase $16-$20 billion on Boeing Planes services. After this agreement, Trump suspended a new round of tariffs that were planned to implement in October, which was an increase to 30% from 25% on Chinese imports that costs $250 billion.
The American President Donald Trump speaks confidently about the partial agreement and states that he had done the greatest and biggest deal ever made for the American farmers in history. The experts, on the other hand, states that it is an only minor improvement which even can be achieved a long time ago. The ongoing economic conflict between two parties in tariffs and accusations of intellectual property thefts still reaches $1 trillion. Therefore, it is unexpected for these parties to conclude a substantial deal.
As a result, the shipping sector will be closely following the meetings of two governments this week. Even though it seems like a slight possibility, an agreement on the shipping sector may help prices to stabilize in the future.