Elevated USGC Tariff Rates Push Oil Barrels Towards Europe

Updated: Dec 17, 2019


In late-September, the Trump Administration issued targeted sanctions covering two subsidiaries of Chinese-owned COSCO shipping. Despite such a move, the market appears weary of utilizing any COSCO assets. In total, the firm owns 47 vessels of which a majority (37) are VLCCs. While the sanctions issuance was rather targeted, the market is finding it difficult to delineate between COSCO vessels that fall under the new sanctions regime. As a result, VLCC freight rates have spiked sharply, holding at nearly $100,000 per day, up from levels near $40,000 per day in July.

Comments from Gibson Shipbrokers, one of the world’s largest shipping companies added support for a VLCC shortage. On Friday, October 4th, the firm made clear that “There remains plenty enough to do for the balance of October for consolidation, or even further gains, before the dust settles...if it does.” Such sentiment was further supported by comments from Ky Lin of Formosa Petrochemical “The market is fearful of sanctions so refiners are taking some preventive measures. We’ll have to see how widely implemented sanctions will be…”

The increase in VLCC rates has pushed up on demand for Suezmax (1 mb) and Aframax (750 kb) size vessels. In turn, this has incentivized U.S. exports towards Europe, which rarely utilize VLCCs.

Through the ten day period ending October 7th, U.S. oil exports headed for Europe held at an all-time record 1.76 mbpd, up by some 1.22 mbpd after bottoming out at 543 kbpd in late-September. U.S. oil loadings meant for the United Kingdom have led the recent increase, holding at 501 kbpd between September 22nd and October 7th. Indeed, the 10-day moving average tracking flows towards the U.K. is also holding at an all-time high just under 600 kbpd. Barrels headed towards the Netherlands (373 kbpd), France (203 kbpd) and Italy (134 kbpd) also dominated over the period.

USGC oil headed for Asia has subsequently weakened given such a trade flow largely requires the utilization of VLCCs to justify the extended shipment times. On a ten day moving average basis, departures headed towards the region held at just 279 kbpd, down from a peak 1.77 mbpd realized on September 17th. A rapid drop in exports meant for South Korea (-635 kbpd) over the period are largely to blame for the sharp overall decline.