Charter Rates for Very Large Crude Carriers

In today’s broad bull market for shipping, most segments are at cyclically high levels, so it’s difficult to identify attractive entry points to invest. A needle in the haystack: VLCC charter rates.

While VLCC (Very Large Crude Carrier) asset values are trading within the top decile of historical levels, VLCC charter rates are weakening.

So, how could someone bet on an anticipated uptick in VLCC earnings without also taking exposure to historically high VLCC vessel prices?

The simplest version of this trade would be to charter a VLCC on a fixed rate, with the expectation that the vessel's earnings will exceed that fixed level over the life of the charter. Market players who have made this type of trade include Sinokor Petrochemical of Korea, Hunter Group ASA of Norway, and Navig8 Group of the United Kingdom (recently acquired by ADNOC Group).

Today's spot earnings on the benchmark VLCC route from the Middle East to China (TD3C) is roughly $21,000 per day and the one-year time charter rate for a VLCC is $45,000 per day. In order to break even on a VLCC charter today, average spot market earnings would have to more than double today’s spot rates over the next twelve months.

Interestingly, the TD3C forward curve is only priced at around $25,000/day over the next 12 months, showing that there is a material gap between the physical and derivative markets that should narrow over time.