China is on a quest for oil supertankers, a sign energy demand has accelerated after the world’s second-largest economy hobbled out of its Covid-19 lockdowns.
Traders transport crude oil to China, the world’s largest oil importer, in Eiffel Tower-sized tankers known as very large crude carriers, each carrying two million barrels of oil. The cost of chartering the most sought-after type of these tankers with modern exhaust systems has risen to nearly $100,000 a day, according to shipbrokers. That’s twice as much as a month ago.
Behind the rise is an increase in crude oil demand in China’s oil refining industry, where US oil is currently in particularly high demand.
China’s economy sputtered after President Xi Jinping lifted Covid-19 restrictions late last year. However, recent data suggests activity is picking up and traders and brokers say demand for oil has started to rise.
According to commodities-tracking firm Kpler, Chinese crude oil imports are on track to match or surpass record levels set in June 2020.
That’s a boon for tanker owners who charter vessels, including New York-listed Frontline PLC, Euronav NV and Teekay Tankers GmbH.
There are other possible effects. Continued growth in Chinese energy demand could push up gasoline and natural gas prices around the world. That would complicate the task of central banks trying to contain inflation.
Chinese imports have not led to higher prices so far. On the contrary, benchmark Brent crude prices have fallen 13% this month to $72.97 a barrel, their lowest level since late 2021. The turmoil in the US and European banking systems has raised fears of a recession, which has shaken western countries would affect energy consumption.
Nonetheless, some energy executives and traders say quenching China’s thirst for oil is likely to push prices higher later this year. “The giant is back,” said Hugo De Stoop, managing director of Euronav, which owns more than 40 VLCCs.
Tankers positioned to ship US crude to China are the hottest vessels on the market, shipowners and brokers say.
Even before this week’s sell-off, weak US demand had dragged US crude prices lower relative to Middle East oil. According to traders, China’s purchase of discounted Russian oil has also picked up after initial hesitation when sanctions went into effect in December.
Ships chartered now would deliver US oil to Chinese ports in late May or early June, just in time to be converted to gasoline for the summer sailing season. Analysts at HSBC said there were 41 tanker bookings in the first 10 days of March compared to 62 for all of February. The analysts added that they expect VLCC rates to stay elevated.
Unipec, the trading arm of the state refinery China Petroleum & Chemical corp
, has led the field with a flood of bookings since early February, according to broker and Refinitiv data. A senior tanker broker in Singapore said more than 20 shipments destined for Unipec bring in about 8.5 million barrels and activity will continue in March.
A spokesman for China Petroleum & Chemical did not respond to a request for comment.
High tanker rates are offset by a drop in other shipping markets, a drop that has set a warning for the global economy. Container freight rates have plummeted. Shippers have halted up to a third of voyages across the Pacific after a slowdown in demand for goods.
Sanctions against Russian oil are curbing the supply of ships – a factor that favors tanker owners. Instead of importing Russian crude from nearby ports on the Baltic and Black Seas, Europe buys from West Africa, the US and the Persian Gulf. Russian oil goes to India or China, sometimes changing from smaller tankers to larger ones en route in the Mediterranean.
Longer voyages tie up vessels that would otherwise be available, said Richard Matthews, director of research at EA Gibson Shipbrokers. Also, a growing portion of the fleet is dedicated to transporting sanctioned Russian, Venezuelan, and Iranian oil, making it unusable for many companies.
“Tankers travel longer distances and ship availability is very tight. I think interest rates will stay high for the next two years,” said Lars Barstad, Frontline’s chief executive.
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Shipping is prone to boom-bust cycles, but this time there’s no rush of new tankers to ease supplies. Uncertainty about the future of marine fuels and regulations has discouraged owners from placing orders. Clarkson PLC, a shipbroker, estimates that tanker capacity will only increase by 2.9% as new ships put to sea. In contrast, the LNG fleet is projected to grow by 50% based on shipbuilders’ order books.
China is expected to increase the world’s daily oil demand by 2 million barrels this year, the International Energy Agency said on Wednesday, taking it to a record 102 million. An open question is how much oil China will consume at home and how much it will refine and export to Europe to replace sanctioned Russian diesel.
“China comes back from Covid: it would not restart overnight. It would always take a bit of time,” said Andrew Wilson, Research Director at BRS Shipbrokers.
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