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On the face of the news, demand for VLCC surged due to an increase in pallets from the Middle East and the far East, while VLCC rates rose 40 per cent last week under the influence of typhoons.

Shen Wanhongyuan said that recently, the oil export volume of the United States and the Middle East has increased significantly, and in all ship types of markets, the freight prices of refined oil products and small and medium-sized oil tankers have remained high, and there has been a significant marginal improvement in VLCC market demand.

Citic Construction Investment Analysis said that after the outbreak of the conflict between Russia and Ukraine, a large number of Russian crude oil seaborne exports moved eastward, and the demand for oil transportation in the far East increased. Russia's exports in the far East are mainly Aphra and Suez tankers, with less VLCC, while threatened by US sanctions, the supply of Aphra and Suez tankers in the far East has plummeted. The widening gap between supply and demand has led to skyrocketing freight rates for Avra and Suez.

In addition, Iran and Venezuela are expected to lift the blockade after Russian crude oil sanctions.

According to Anxin Securities, if Iran exports 2 million barrels per day, it corresponds to 61 VLCC demand, accounting for about 7 per cent of the industry's capacity. The aging characteristics of Iranian oil tankers are highlighted, and some old oil tankers are expected to be sent to the ship-breaking market after the lifting of the ban. So if Iran and Venezuela lift the ban, it will bring incremental demand, and supply is not expected to be large.

New ships are in short supply

Anxin Securities said the increase in industry supply depends on new shipbuilding orders, which currently account for 5.0 per cent of existing capacity, the lowest in history since 1997. At the same time, considering the high prosperity of the container transportation industry in 2021, the berth accepts a large number of orders for collection ships, while the oil transportation industry suffers a historic downturn. At present, shipowners' cash flow is tight and shipbuilding will be low. It is expected that new shipbuilding orders will remain low in the future.

In the case of limited increment, the core contradiction of industry supply lies in the disassembly of stock. As of June 2022, the proportion of ships aged 20 and above in the industry was as high as 11.02%, and the characteristics of aging were prominent. Restricted by the operational efficiency of old ships, the average age of ship dismantling in the industry is about 20 years, and with the increasingly stringent environmental regulations, the number of years of ship dismantling continues to decline. At present, the existing orders and new shipbuilding orders in the industry are limited, and the potential number of ship dismantling is relatively large, and it is expected that the growth rate of capacity supply will enter the downward channel.

In addition, as the new regulations of EEXI and CII will be implemented in 2023, which mainly limit carbon emissions, nearly 40% of ships need to be adjusted, and most non-compliant ships use limits on engine power to meet the standards. The impact of the new environmental protection regulations on the supply of transport capacity is more reflected in the upward elasticity of limiting transport capacity.

The shortage of transport capacity will be more serious next year.

Guohai Securities pointed out that the European Union will impose a total embargo on Rosneft in early December and early February 2023. At present, European Rosneft oil imports are only 30%, 40% lower than before the conflict, and 60% of Rosneft's volume still needs to be adjusted, which may trigger a larger route switch at a time when capacity is tight.

Anxin Securities expects VLCC demand to grow by 1.7 per cent in 2024, returning to 2019 levels, while Clarkson forecasts that VLCC supply will grow by just 0.02 per cent in 2024. In the next 2-3 years, the gap between supply and demand will gradually increase, and the certainty of the business cycle of the industry is strong. Considering the steep demand curve of oil transportation, combined with historical cycle review, freight rates tend to rise significantly during the upstream period of the boom.