Surging Chinese Oil Demand Pushes Tanker Costs Sharply Higher

A burst of U.S. exports to China is driving up charter rates for world’s biggest crude tankers

China is on an oil-supertanker hiring spree, a sign energy demand has sped up after the world’s second-largest economy limped out of its Covid-19 lockdowns.

Traders carry crude to China, the world’s biggest oil importer, in Eiffel Tower-size tankers called Very Large Crude Carriers that each lug two million barrels of oil. The cost of chartering the most coveted type of these tankers, featuring modern exhaust systems, has shot up to nearly $100,000 a day, ship brokers say. That is double the rate from a month ago.

Behind the rise is a spurt of crude demand in China’s oil-refining industry, where U.S. oil is in particularly high demand right now.

China’s economy stuttered after President Xi Jinping ended Covid-19 restrictions late last year. But recent data suggest activity is perking up, and traders and brokers say demand for oil has started to surge.

Chinese crude imports are on track to match or surpass the record level from June 2020, according to commodity-tracking firm Kpler.

That is a boon for tanker owners that rent ships out, including New York-listed Frontline PLC, Euronav NV and Teekay Tankers Ltd.

There are other potential implications. A sustained increase in Chinese energy demand could boost gasoline and natural-gas prices globally. That would complicate the task of central banks trying to tamp down inflation.

Chinese imports haven’t fed into higher prices so far. On the contrary, benchmark Brent-crude prices have dropped 13% this month to $72.97 a barrel, their lowest level since late 2021. Turmoil in the U.S. and European banking system raised fears of a recession that would crimp Western energy consumption.

Nonetheless, some energy executives and traders say quenching China’s thirst for oil is likely to propel prices later this year. “The giant is back,” said Hugo De Stoop, chief executive of Euronav, which owns more than 40 VLCCs.

Tankers positioned to ship U.S. crude to China are the hottest ships on the market, say shipowners and brokers.

Even before this week’s selloff, lackluster U.S. demand had pulled the price of U.S. crude down compared with Middle Eastern oil. China’s buying of discounted Russian oil has also increased after initial hesitancy when sanctions took effect in December, according to traders.

Ships chartered now would deliver U.S. oil into Chinese ports in late May or early June, just in time to be converted into gasoline for the summer driving season. Analysts at HSBC said 41 tanker bookings occurred during the first 10 days of March, compared with 62 for all of February. The analysts added that they expect VLCC rates to stay at high levels.

Unipec, the trading arm of state-owned refiner China Petroleum & Chemical Corp., has led the pack with a flurry of bookings since the start of February, according to brokers and Refinitiv data. A senior tanker broker in Singapore said that more than 20 Unipec-destined cargoes were bringing in about 8.5 million barrels, and that the activity continues in March.

A China Petroleum & Chemical spokesperson didn’t respond to a request for comment.

High tanker rates contrast with a retreat in other shipping markets, a decline that has flashed a warning about the world economy. Container-freight rates have tumbled. Shippers have cut as much as one-third of voyages across the Pacific after a slowdown in goods demand.

Sanctions on Russian oil are squeezing the supply of ships—a factor favoring tanker owners. Instead of importing Russian crude from nearby Baltic and Black Sea ports, Europe is buying from West Africa, the U.S. and the Persian Gulf. Russian oil heads to India or China, sometimes swapping from smaller tankers to larger ones en route in the Mediterranean.

Longer trips tie up ships that would otherwise be available, said Richard Matthews, research director at E.A. Gibson Shipbrokers. Plus, a growing portion of the fleet is dedicated to moving sanctioned Russian, Venezuelan and Iranian oil, rendering it unusable for many companies.

“Tankers are traveling longer distances and ship availability is very tight. I think rates will stay strong for the next two years,” Frontline Chief Executive Lars Barstad said.

Shipping is prone to boom-bust cycles, but this time there is no rush of new tankers to ease supply. Uncertainty about the future of marine fuels and regulation has deterred owners from placing orders. Clarkson PLC, a ship brokerage, estimates that tanker capacity will grow just 2.9% from new ships hitting the water. In contrast, the liquefied-natural-gas fleet is set to increase 50%, based on shipbuilders’ order books.

China is expected to drive a two-million-barrel rise in the world’s daily oil demand this year, the International Energy Agency said Wednesday, pushing 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 coming back from Covid: It wasn’t going to restart overnight. It was always going to take a little bit of time,” said Andrew Wilson, head of research at BRS Shipbrokers.