Introduction of tanker ships ② Freight rate (WS) introduction, market trend analysis, oil price trend check

The second chapter, Introduction to Tanker Ships, is written in order to introduce the overall market conditions of oil tankers, the concept of calculating freight rates, and the trend of oil prices.

I hope this helps you look at the overall flow.

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1.    Worldscale(WS)

 If you look at the classification of ships covered in the previous article, you can see that container ships are classified as liners, and bulk carriers and tankers are classified as tramps.

Among tramps, the biggest difference between bulk carriers and tankers is the rate calculation method. For tanker ships, Worldscale is used to calculate freight rates. The purpose of this indicator is to express the base fare of major routes as an index because tanker routes are scattered around the world and transport distances are different. In other words, since it is an index created under the assumption that shipowners' income, excluding variable costs such as port and fuel costs, is the same on any route around the world, it has the advantage of reducing time and effort in concluding contracts between shipping companies and shippers.

 

Looking more closely, the tanker rate calculation method appears as “FLAT RATE x WORLDSCALE / 100 per route”.

To add an explanation, the flat rate is the amount corresponding to the break-even point when the world scale 100 for each route is applied, and the standard rate is issued through the Worldscale Book every year.

Worldscale is different for each contract and is a weight used when negotiating freight rates according to fuel cost and market conditions, and the unit is applied in %.

To give an example for tanker rate calculation,

The flat rate in January 2023 is identified as $12/ton based on Middle East/China. Here, the final fare is determined according to the fluctuation of Worldscale.

Let's compare using the average WS of the three years based on VLCC, respectively.

• As of 2020: 12 X 62/100 = final fare 7.44$/ton
• As of 2021: 12 X 35/100 = final fare 4.2$/ton
• As of October 2022: 12 X 96/100 = final fare 11.52$/ton 

Even with the same standard freight rate, it can be seen that the actual contracted final freight rate differs according to the weight application of Worldscale according to the market conditions at the time of the contract.

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2.    Introduction of VLCC (TD3C) representative routes and market conditions

 

The TD3C (Middle East-China) route is often mentioned when referring to the VLCC tanker market.

 

 Previously, tanker freight rates are displayed on the World Scale, but it is difficult to know what the market conditions are by looking at the World Scale alone. Therefore, it is expressed by transforming it based on charter rate. Converted charter rates at that time are expressed as Time Charter Equivalent assessments (TCE). Charter rates are expressed in the form of $/Day, and TD3C is often quoted when showing tanker market conditions graphs to gauge the current market conditions.

Looking at the description of the TD3C Route, it refers to the route from the Middle East Gulf to China based on a 270,000-ton oil tanker. The main shipping ports are from (Ras Tanura) in Saudi Arabia to (Ningbo) in China.

 

Looking at the VLCC TD3C trend, daily conversion revenue reached $300,000 in October 2019, $250,000 in March 2020, and most recently $100,000 in November 2022.

1. All of them recorded high market conditions, but if you look closely, the reason for each rise was slightly different. In 2019, when the US sanctioned COSCO Shipping (Dalian) for violating sanctions on Iranian crude oil trade, 26 VLCC tankers owned by COSCO Shipping at the time were tied up.
2. In 2020, Saudi Arabia announced an increase in production to Russia, which rejected the proposal to cut production among oil-producing countries, which led to an increase in trade volume in the market, resulting in high market conditions.
3. In the case of the recent 22 years, as the pandemic passed amid supply restrictions, the demand for crude oil increased and the strategic oil reserve was released as a defense against rising crude oil prices, and the market situation rose.

The reason for each increase was slightly different, but in the end, a sharp rise appeared in the power struggle between supply (ships) and demand (crude oil). So, let's talk a little bit more about the demand (crude) part.

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3.     Introduction of major shippers

You can refer to the table above for the current status of all ship owners of crude oil ships. China COSCO ranked first with a total fleet of 17.18M DWT and 74 vessels.

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4.     International Oil Prices (Demand/Supply) and Trends

Let's take a look at global oil supply and demand levels and the movement of Brent crude oil prices.

The green bar graph is the quarterly oil supply/demand ratio, and the solid line is the Brent oil price.

Looking at the recent demand/supply (%), the number exceeded 100 for 7 consecutive quarters from the 3rd quarter of 20 to the 1st quarter of 22, starting with the 2nd quarter of 2020, which was affected by the corona. will be recorded. In addition, Brent oil also started to rise from about $43 in the 2nd quarter of 2020 and rallied to about $112 in the 2nd quarter of 2023.

 

Looking at the price outlook from the supply and demand side, oil demand has exceeded 100 million barrels per day since the 4th quarter of 2022, and demand is expected to continue to rise above 100 million barrels until the 4th quarter of 2023. Demand growth mainly in China is judged to be the largest part due to expectations of economic recovery following China's reopening.

In addition, OPEC+'s crude oil production cuts are being maintained, so international oil prices are expected to lead to an upward trend from a supply-demand perspective.

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5.     Crude Oil Drilling Number Inspection

Let's also look at the trends in the number of US crude oil rigs and international oil prices (Brent). The blue graph is Baker Hughes Rig count, and yellow is Brent crude.

 

  On a cycle basis, when the international oil price rises, the decreased rig count increases again, which affects the future supply increase, leading to a cycle in which the international oil price falls again and the rig count also decreases. As the demand for crude oil decreased due to the impact of Covid-19, the rig count in August 2020 was 172, a decrease of almost 1/7 compared to 2 years ago. Since then, as expectations from rising crude oil demand have been reflected in international oil prices, rig counts are also increasing with a time lag. As of the end of January 23, it seems that it is not yet at the level of worrying about oversupply with the 599th.

 

thank you