Both demand and supply side fundamentals point to an ongoing seasonal recovery in rates over Q4, which has some upside but remains capped by the overarching issues of excess tonnage and OPEC production cuts this year.

On the supply side, fleet growth has been concentrated in the larger tanker segments. Fleet growth for VLCCs and Suezmaxes reached around 5\% and 7\% respectively this year so far. While another 15 newbuild VLCCs and 19 newbuild Suezmaxes are scheduled for delivery in Q4, actual deliveries are likely to be lower due to slippage. As such, the pace of newbuild deliveries is expected to ease over Q4. Another silver lining lies in the accelerated pace of tanker demolitions since August due to weak earnings and high scrap values.

Continued elevated demolition activity will help to offset some of the upcoming newbuild deliveries, setting the stage for a market recovery. While the ongoing OPEC production cuts until March 2018 continue to loom in the background, a seasonal spike in winter demand as well as weather delays are expected to lend some support to crude tanker rates. Lower crude allocations cuts by Saudi Arabia in October (-350 kb/d) compared to September (-520 kb/d) as reported by Reuters will also boost cargo demand ex-AG. November-loading Middle East and regional crude premiums have been lifted by robust refinery margins in Asia, a backwardated market which raises demand for shorterhaul cargoes as well as the wide Brent-Dubai spread. Average complex refinery margins in Asia for September were 34\% higher than that of January to August this year. Firm demand for regional grades is expected to benefit the Aframax segment in particular, which saw a recent bounce in rates in September.

The wide Brent-Dubai spread has rendered WAF and North Sea crudes less attractive to Asian end-users, with WAF cargoes from the October loading program left untraded as reported by Reuters. Reduced November loading programs from both Nigeria and Angola are expected to further lower WAF exports to Asia in Q4, weighing on VLCC ton-mile demand. However, this may be offset by continued interest to move crude from the USGC/Caribs to the East as long as the WTI-Brent spread remains above US$5/bbl. As recently seen, firm demand for VLCCs loading in the Caribs drew ballasters from the AG region, tightening the position list (especially for modern units) and underpinning the current rally in rates.
Source: OFE Insights