June 12, 2020
We have not been short of “black swan” events since the start of 2020 with the market swaying from one side to another and traders and analysts alike redoing projections almost every month. This week had another potentially major event unfolding with the sanctioning of four ship-owning entities by the US’ Treasury Dept. Office of Foreign Assets Control (OFAC). The sanctions were brought upon tankers that loaded and transported Venezuelan crude oil between February and April 2020. There are multiple ways to look at the event and projections in the market and we will explore a few of them here.
We have already observed an impact on the general sentiment in the chartering markets. Following the sanctions announcement, we saw some traders intensifying their focus on the history or traded ships, with some going as far as to exclude vessels that have loaded in Venezuela in the past year. This precautionary move assumes the US Government may expand sanctions to additional vessel-owning companies. If no further action is taken, we may see more owners ending Venezuela deals altogether and putting their ships back to the global trading fleet. This would also reduce the country’s oil exports effectively to zero.
However, the situation may change dramatically if OFAC does expand sanctions. In past analyses, we have demonstrated the impact ship utilization rates have on freight rates and for this case, we have looked at the impact on VLCC utilization in two different scenarios.
For the first scenario, we calculated the potential impact with about 28 VLCCs effectively removed from trading. The number came from calculating the VLCC fleet that is tied to the four companies already sanctioned. If it becomes a reality, we are expecting to see an increase of about 1.44% on VLCC utilization for June, something that will translate to and approximately US $20,000/day increase in TCEs for non-eco tankers (Figure 1). The difference is expected to shrink as rates generally are expected to weaken during Q3 and Q3 2020.
For the second scenario, we expanded the sanctions to all the VLCCs we have observed loaded in Venezuela since January 2020 (using AIS data). Since the total number of tankers goes up to 121, the effect projected is far more dramatic. For the month of June and July we could see utilization rates going up to 7 percentage points higher, something that according to our model can translate to TCEs that can surpass the US $300,000/day mark (Figure 1).
We do not have enough information to make an assessment on whether sanctions will expand and in what form, but we are monitoring the situation closely given we may be heading towards another huge market upset.
Figure 1 – Potential VLCC Utilization and TCE Impact from Venezuela Sanctions