Crude Oil Freight Rates Plunge to Record Lows

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Overcapacity meets broken promises of soaring demand.

The rates for shipping a tanker-load of crude oil by Very Large Crude Carriers (VLCC) from Rotterdam, Europe’s largest port for the throughput and storage of crude oil, to Singapore, the world’s largest crude oil transshipment center, have dropped another $200,000 since the last assessment, to $2.25 million, according to S&P Global Platts, the lowest level for that route since Platts started tracking VLCC data in 2006.

That’s down by $4.15 million from the $6.4 million price tag in January – a 64% plunge in eight months!

Platts blamed the “large supply of available ships” on the Europe to East route.

Overcapacity in face of lackluster demand is a terrifying condition if it spreads far enough across an industry. As prices get totally crushed, it can lead to bankruptcies and the collapse of entire industries, huge job losses, and massive capital destruction that will spread deeper into the overall economy.

Often, investors aren’t the only ones on the hook. Taxpayers, sitting ducks, savers, and other innocent bystanders are shanghaied into bailing out the industries or at least some major players, either directly via government subsidies and other support or indirectly and less visibly via central bank shenanigans. That includes GM and Chrysler in the US and Canada during the Financial Crisis. It includes the often state-owned steel giants in China via their state-owned banks.

Overcapacity has been ravaging the container carrier industry. Last week, Hanjin, the seventh largest container carrier in the world and a unit of Hanjin Group, Korea’s tenth largest conglomerate, filed for bankruptcy. It has been torpedoing even large shipbuilders, and the entire industry, particularly in China and Korea, is keeling over.

Overcapacity is the result of misallocation of resources by investors and/or governments that have been fooled by their own optimism, twisted policies, and central bank promises that their QE and a flood of cheap money would actually create real-economy demand.

And overcapacity is now also sinking the oil tanker market.

Platts, in observing crude oil “freight rates near historic lows in a variety of regions” across the VLCC spectrum, added:

The main factor behind the dropping rates has been an increase in global VLCC supply, with a large number of newbuilds joining the existing fleet.

During the oil boom – now reduced to fond memory – when WTI was trading above $100 a barrel and when the global economy, driven by central-bank machinations around the world, was expected to accelerate to “escape velocity” and send demand for crude oil surging, during those promising years after the Financial Crisis, when only the sky was the limit to executive imagination, carriers ordered a large number of these mega-tankers to meet that surging demand in the future.

Since years go by between an executive decision and taking delivery of these ships, the new fleet has been entering service with impeccable timing just as the oil price began to crash.

And the deliveries aren’t stopping anytime soon. According to Affinity Research, cited by Platts, 24 new VLCCs have already been delivered in 2016, and 13 more are expected to be delivered during the remainder of the year, for a total of 37. Next year, an additional 39 VLCCs are expected to be delivered.

Tankers categorized as VLCC have a capacity of over 200,000 DWT (deadweight tonnage) and up to 320,000 DWT. Anything larger is an Ultra Large Crude Carrier (ULCC). So one VLCC can carry over 2 million barrels of oil. By comparison, US net imports of crude oil and petroleum products is less than 5 million barrels per day – two tankers. So 70 additional tankers of this size, on top of an already oversupplied market, represents an enormous overcapacity.

And this, according to the report, “is likely to heap further downward pressure on what are already historically low freight rates.”

That’s good for those who pay for oil and petroleum products. Shipping costs are down. They might save a little, or profit margins might edge up.

But overcapacity of this type doesn’t just disappear. It ravages the industry for years. It causes extensive bloodletting. And once it has ravaged enough and enormous amounts of capital have gone up in smoke, some of the dynamics change, prices rise, and survivors emerge. Building and then destroying overcapacity is one of the most wasteful and destructive activities of an economy. And in the era of free money and senseless “stimulus,” we’re seeing more and more of it.

The Hanjin bankruptcy “shatters the complacency” that the largest container carriers, considered too big to fail due to their role in global trade, “are immune to failure.” Read…  “Zombie Apocalypse”: The Hanjin Bailout that Didn’t Happen

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  37 comments for “Crude Oil Freight Rates Plunge to Record Lows

  1. Álvaro
    September 7, 2016 at 2:05 am

    Samsung Says $38 Million of Goods On Board Two Hanjin Vessels

    • vooks
      September 7, 2016 at 3:32 am

      Well, most of it would have been recalled anyway.

      Has Apple commented?

      • Nicko
        September 7, 2016 at 5:14 am

        Most likely it’ll spontaneously combust before reaching port. :D

      • Chuk
        September 7, 2016 at 7:44 am

        Phones are sent by aeroplanes. Samsung most likely has washing machines and vacuum cleaners on those ships.

  2. NotSoSure
    September 7, 2016 at 3:35 am

    I have friends in Singapore and according to him, the pain from oil and gas is spreading locally. Real estate prices have remained decent though.

    Singapore is really the canary in the coal mine. If it breaks, then you somewhat know that SHTF.

    • Nicko
      September 7, 2016 at 5:16 am

      Look at Dubai, Qatar, and Saudi…they’re really starting to suffer – halting mega-projects, instituting a VAT tax, airport tax. The humanity.

      • nick kelly
        September 7, 2016 at 7:42 am

        And speaking of humanity- the thousands of Asian ‘guest workers’ who haven’t been paid and need exit visas to leave.

    • September 7, 2016 at 7:44 am

      Yes…. Singapore Residential Property Price Index is down nearly 10% from its peak in July 2013.

      • tim
        September 7, 2016 at 8:10 am

        taking into consideration that the fuel cost for a metric ton is droppen constantly the drop is just logic.
        one metric ton of HFO 380:

        today: 218 USD
        one year ago: 250 USD
        two years ago: 575 USD

        total use of fuel for a 42 day journey 2500mt HFO. Taking the consumption of MGO into account you have close to 200k USD less in fuel costs which the client has to pay.

        i hope it makes sence.

        • September 7, 2016 at 10:04 am

          That $200K drop was just since Platts’ last assessment. Since January, the cost has dropped by $4.15 million.

          The way I wrote it in the article wasn’t very clear. So I have now clarified that line.

      • NotSoSure
        September 7, 2016 at 9:29 am

        I was expecting a bigger fall. a 10% fall over 3 years is nothing. I know that luxury residences in Sentosa Island have taken quite a big hit (which is probably responsible for much of the 10%), but government housing (HDB) resale prices have gone from strength to strength, which is insane. People are paying 1 million SGD to stay at government housing in “good” locations.

        • September 7, 2016 at 9:45 am

          It’s not a “crash” for sure, but a relentless, month after month, drip-by-drip kind of decline, the longest decline on record (but by no means the sharpest).

          I suspect that this slow drip-by-drip decline might be what we will be seeing in other markets. That vast amount of liquidity out there and the ultra-low interest rates might prevent sharp and relatively brief price adjustments. Instead, this might take a long, long time.

      • Thomas Malthus
        September 7, 2016 at 3:39 pm

        Much of that is due to government policies that were aimed at cooling the market

  3. Gerald Stehura
    September 7, 2016 at 8:58 am

    Once again… when dealing with oil prices and cargo ships etc… the 1000 lb gorilla in the room is Climate Change. It’s like our happy motoring will continue forever as our only ecosystem collapses.
    In California, home owners are losing their insurance because of forest fires. We seem to be stuck in inertia with nothing pushing against it. We are a population living in illusion. We don’t seem to care about what we leave our children… massive debt – OK….Dead Oceans -OK… SUFFERING as we have never known it before – -OK.

    • Frederick
      September 7, 2016 at 9:45 am

      Isnt there a state insurance fund that they can get insurance through like in NY for flood insurance? If not than I suppose they shouldnt rebuild as the location must be too risky
      Things will begin to unravel much faster soon in the US at least IMO I feel it in my bones

    • September 7, 2016 at 9:53 am

      OK, with or without climate change, in California we have two seasons: rainy season (not much rain) and fire season. That’s been that way since long before humans first arrived. Only now, after 100 years of fire suppression, the deadwood (perfect fuel) that has accumulated in the forests turns run-of-the-mill forest fires into blazing infernos. While adult trees used to be able to survive forest fires before the advent of fire suppression, they no longer do.

      Also, “dry lightening” was the dominant NATURAL cause of fires. But I have read that the dominant cause today is human behavior that ignites fires (campfires, cigarette butts, arson, etc.).

      • Edward E
        September 7, 2016 at 12:30 pm

        At least you don’t have KUDZU vines along the left coast stretching northbound toward Canada like we have in the East and Midwest. Could not wish that on anyone. Maybe when it finally reaches Canadian territory folks will wake up that warming is back with a vengeance. If we lose the Arctic, our air conditioning could sputter out enough and who knows how far the kudzu could go. I once sprayed about an acre of the stuff with Redeem R+P and set the dead vines on fire. Poof, up in massive flames, neighbors stopped by worrying if they should call in reinforcement.

        • Chicken
          September 7, 2016 at 4:30 pm

          KUDZU is an invasive species brought here by our government for the purpose of feeding cattle and has been a problem for as long as I can recall.

        • night-train
          September 8, 2016 at 1:49 am

          Some folks make jelly and wine with the Kudzu flowers. Kudzu was also used to stabilize slopes and prevent erosion. It also took over the south. It may be time to get all George Washington Carver with Kudzu. Who knows what we might find?

    • Bryce Nelson
      September 7, 2016 at 2:15 pm

      Well said Gerald. I am also amazed at the amount of complacency when it comes to our own environment. We are destroying the very thing that we depend on for life. The risk:reward is terrible when it comes to not addressing climate change. The vast majority of energy investors don’t seem to care about climate change. They don’t want to address the problem because it might cause their stocks to go down. It kind of reminds me of tobacco stocks and their misinformation decades ago.

      It also doesn’t help when half of our government doesn’t believe in anthropogenic global warming. Every other country in the world accepts it, but here in the US that would interfere with the “free market.” One thing that I am sure of that is on the rise is anti-intellectualism.

      • Thomas Malthus
        September 7, 2016 at 3:41 pm

        If they did believe — what could they do about it?

        Civilization is built on cheap energy. Fossil fuels.

        If we stopped or even slowed the burning of these fuels – when there is no alternative — then the economy would collapse.

        There is no alternative.

        So burn baby burn! Otherwise we starve

        September 7, 2016 at 5:34 pm

        Not every country believes in Man Made Globalist Warming.

        Russia does not. In fact, they are expecting a Mini-Ice Age.

        • night-train
          September 8, 2016 at 1:58 am

          Global warming is what the data shows, therefore that is the problem on the table. A mini-ice age would be more of a black swan event, most likely resulting from a sizable increase in vulcanism, or the eruption of a super volcano.

        • Nicko
          September 8, 2016 at 10:39 am

          Russia’s economy is shrinking by the day, now smaller than Australia. They aren’t to be copied.

  4. r cohn
    September 7, 2016 at 10:02 am

    Lets look at this issue in a little more detail.
    Supply of new tankers especially that of more efficient VLCC are obviously expanding.A number of older ships with smaller capacity are no longer economic and will go to the salvage yards.
    Demand consists of two main aspects.Demand for ships used to transport crude oil and demand for ships used to store oil..The former is up a small % over last year while the latter has plummeted as crude oil is drawn down .
    Crude oil in storage increases during the fall/winter and is drawn down during the spring / summer as demand for oil seasonally increases .This happened as usual during the summer of 2016..Now the more interesting question comes up this fall through winter.How much will the supply of oil exceed the demand for oil during this period of the year?The reason why it is especially relevant to tanker rates is that crude oil in storage is currently at all time highs for this time of the year.There are ~350 m barrels in land based storage available worldwide.This storage capacity is not evenly distributed throughout the world and is concentrated in the Gulf Coast of the US ,Rotterdam ,Singapore and Qingdao in China among others. If we start approaching storage capacity in land based storage,demand for storing oil in tankers will jump. This is is what happened last year and what caused tankers rates to zoom up last winter.And if supply of oil exceeds demand to the point where both land based storage and available storage in tankers is close to capacity,then what happens to oil prices .Economic theory suggests that oil prices could plummet to the marginal cost of extracting oil.While this cost varies by region,it is a lot lower than the current market of $45 WTI.

  5. Ptb
    September 7, 2016 at 10:09 am

    All this good news just keeps coming….Hmmm, when’s the Fed going to raise rates??

    • Meme Imfurst
      September 7, 2016 at 12:34 pm

      In two weeks….Janet’s favorite chart just went positive…200K more job openings than expected. I could use a third job actually, rent just went up by 25%.

  6. HR
    September 7, 2016 at 10:20 am

    Anybody know how many millions of barrels of condensate are included in the storage glut numbers? The statistics for production have been changed to BOE for a reason.

  7. OutLookingIn
    September 7, 2016 at 11:03 am

    Quickly running out of storage space.

    Saldanha Bay in South Africa is a very large crude oil storage facility of some 45 million barrels capacity.
    It is linked by pipeline to South Africa’s Milnerton Terminal operated by Chevron. It is currently undergoing an assessment for refurbishment, to provide a further 7.5 million barrel of capacity.
    What this means is that the Suldanha Bay facility is running at near full capacity.

    Drip by drip, drop by drop, the above and underground crude oil storage capacity in the world is filling up. As each day passes that this overcapacity is allowed to continue, means another future day of use and low crude prices.

  8. Meme Imfurst
    September 7, 2016 at 12:41 pm

    I have to admit that ol’ Warren B is very smart. He runs his tanker trains back and forth across the Canadian Border, never unloads a drop on either side ( less spills of course) and gets a nice government check subsidy for each trip. Millions of worthless fiat dollars a year.

    So if these companies could just put wheels on those boats, in no time they could be in the green.

    • Chicken
      September 7, 2016 at 4:51 pm

      Good point, get long tanker wheels!

  9. September 7, 2016 at 3:37 pm

    I’m sure one or two of you guys with super internet skills can find this out…. But here it goes….


    The rates for shipping a tanker-load of crude oil by Very Large Crude Carriers (VLCC) from Rotterdam, Europe’s largest port for the throughput and storage of crude oil, to Singapore, the world’s largest crude oil transshipment center, have dropped another $200,000 since the last assessment, to $2.25 million, according to S&P Global Platts, the lowest level for that route since Platts started tracking VLCC data in 2006.

    That’s down by $4.15 million from the $6.4 million price tag in January – a 64% plunge in eight months!””

    The margin has to inside that 64% – ?

    Now there is lots of talk about the break even cost of oil drilling, ~ $35/bl or somewhere around there…. Well what is the break even point for the container ships ? I read some of those super duper container ships can use a million or more gallons of “gas” (diesel of some kind) to ship stuff across the pond…. Define your pond, and cost, Are they doing this at a loss yet ? Seems so….? So the oil business along every mile from in the ground to in my tank is a big loss….? Why don’t they all go home for 5 days and drive up their profit….? Is that not something they can even dream up? How can the only answer they can think of be – Pump as much as you can so we can make $10. at the end of the week…

    • wratfink
      September 7, 2016 at 5:17 pm

      See Tim’s comment above for fuel pricing. I believe they use bunker fuel, which is some of the heaviest and cheapest fuel there is.

      They can’t go home for a week. Oil wells cannot easily be shut down and started back up. So they must keep pumping the oil at most any cost if just to pay the interest on their debt through cash flow. It is a boom and bust industry.

      Lotsa busts coming up in the oil patch in the near future. The drillers cannot get a price that is profitable and the customers cannot afford to pay a price to make it profitable.

      CapEx has tanked so when supply eventually drops to demand levels there will be shortages and rationing and many vehicles abandoned at the end of the driveway.


  10. nash mann
    September 7, 2016 at 11:43 pm

    will the drop in cost for crude delivery make it to expensive to build pipelines and make them financially unfeasible

  11. Yoshua
    September 8, 2016 at 10:17 am

    World crude oil exports peaked in 2004 and have been on a plateau since then. Conventional crude oil production peaked in 2005 and have also been on a plateau since then.

    The increase in oil production since 2005 have come from unconventional oil production mainly from North America. U.S oil imports have declined from 12 mbpd in 2008 to 5 mbpd today.

    The U.S is no longer the swing consumer, China is today the swing consumer.

  12. Graham
    September 18, 2016 at 12:14 pm

    This was an interesting read, about the rapidly declining output of US oil wells and the lack of money in shale.

    Looks like the US will need to start importing more at some stage – barring a huge recession…

Comments are closed.