The very large crude carrier (VLCC) market has boomed this year against the backdrop of the Middle East war, but concerns are mounting in the shipping industry about a potential supply glut in the tanker market. VLCC newbuilding orders have surged to a record high this year and prices have climbed sharply, as tanker rates jumped and demand from Middle Eastern oil-producing countries to secure large tankers increased. For context, VLCCs are the workhorses of long-haul crude trade, carrying about 2 million barrels per voyage, so the balance between fleet size and oil trade volumes is a central determinant of freight rates and shipowner earnings.

Within the shipbuilding and shipping industries, voices are drawing parallels between the current VLCC ordering boom and the boom of roughly 20 years ago, when the market slumped after the 2008 financial crisis due to oversupply. The comparison matters because tanker markets are cyclical: high rates encourage ordering, but the two-to-three-year lag before delivery means new ships often arrive after conditions have changed.

According to Maritime Strategies International (MSI) on the 28th, 177 VLCCs were contracted for new construction worldwide in the first half of this year. The total deadweight tonnage of VLCCs ordered in the first half reached 54.5 million DWT, surpassing the previous annual record of 32.6 million DWT set in 2006.

VLCC newbuilding prices have exceeded $130 million per ship, the most expensive level since 2008, when prices topped $150 million. The construction price for one 300,000 DWT-class VLCC that Hanwha Ocean won in April from Greek shipowner Kalouva Maritime was $130 million, about 4% higher than the $125 million order price in August last year.

A key driver of the surge in VLCC ordering demand and the sharp rise in prices this year is the move by Middle Eastern oil-producing countries to secure their own vessels. In crude oil transactions, it is common for the buyer—refiners or traders—to arrange a tanker and load at the producer's port. Even when the seller, the oil-producing country, bore responsibility for the vessel, it was more common to charter from a shipping company than to own ships directly.

That changed after the Middle East war broke out in February, when operations in the Strait of Hormuz were all but paralyzed. Prompted by growing disruptions to crude transport, oil-producing countries moved to build their own VLCC fleets and secure the ships directly as a way to keep exports flowing. VLCCs are the largest class of crude tankers and can carry about 2 million barrels of oil at a time.

In the shipbuilding and shipping industries, there are concerns that when the ships ordered this year are completed and delivered in 2028–2029, the tanker market could face oversupply. Given that vessels are typically delivered two to three years after a construction contract, when the new VLCCs enter the market, supply could exceed demand, pushing rates down and reducing vessel profitability. As of the end of the first half, the VLCC order backlog exceeds 310 ships. According to global shipbroker BRS, 60 ships are scheduled for delivery in 2027, 127 in 2028, and 125 in 2029 and beyond. The ratio of VLCC orders on hand to the currently operating VLCC fleet size has jumped to 35%.

MSI analyzed: "About 83% of VLCCs ordered in the first half of this year are scheduled for delivery in 2028 and 2029, which could place a heavy burden on the supply-demand balance in the VLCC market going forward."

With the VLCC order backlog at its highest level since 2008, concerns are emerging about a supply glut similar to that period. From 2004 to 2008, expectations of increased crude flows driven by rising crude imports in emerging economies such as China and India led to a sharp increase in VLCC orders. In 2008, about 100 VLCCs were ordered between January and August, peaking at nearly three times the annual order volume in 2007.

When the financial crisis erupted in the second half of 2008, however, market sentiment shifted rapidly. Ships ordered during the boom began to be delivered from 2009, and weakening demand due to the economic slowdown coincided with rising vessel supply, intensifying oversupply pressure. From 2011 to 2013, new VLCC orders plunged.

George Economou, founder of Greek shipping company TMS Group, said at an international shipping exhibition held in Greece in April: "The current tanker boom is somewhat better than the 2004–2008 tanker market boom, but if this situation continues, it will have a negative impact on the tanker industry."

There is also a counterargument that today's situation differs from 2008. Global shipbroker Braemar said: "The recent surge in tanker orders, especially VLCCs, is indeed a concern, but considering the replacement of aging vessels and demand for ships using eco-friendly fuels, even if the intake of new vessels increases, the overall fleet growth will remain manageable." How the delivery schedule unfolds over 2027–2029, alongside the pace of scrapping older vessels and any further ordering, will be a key factor shaping the VLCC market's supply-demand balance in the years ahead.

Source: ChosunBiz