TD34 Cal27 for a non-scrubber VLCC is down 40% since Tuesday, at $134k/day. Over the same period, the spot market dropped 8%. Mid-sized crude tanker FFAs have also fallen precipitously since Tuesday. Suezmax Cal27 (TD20) is down 49%, at $44k/day. Aframax Cal27 (TD25) is down 38%, at $41k/day. Mid-sized spot markets have softened more aggressively since Tuesday. TD25 is down 39%, at $108k/day. TD20 is down 27%, at $225k/day.
By Mary Melton
We believe the sell-off of crude tanker FFAs since the US midterms elections has been overdone.
The sell-off would suggest one or more of the following is at play:
Market players are now anticipating a reduction of geopolitical risk and a normalisation of Middle East trade. Traders may be assuming a heavy Republican defeat and JD Vance’s public diagnosis that the war in Iran is to blame will push Trump into negotiating a peace settlement with Iran. There is also a perception that Democrats could use their new strength to force a reversal Trump’s Iran strategy, perhaps by cutting military funding.
Selling could also represent a rush to lock-in profit at today’s extraordinary levels irrespective of traders’ directional view.
FFAs are following oil prices. Front-month Brent fell $9/bbl yesterday to $94.6/bbl, a two-month low, before strengthening to $96/bbl.
However:
There are no clear indications that Trump will now accept a negotiated settlement with Iran on Iran’s terms. Weapons, troops, air defences and a third aircraft carrier are on their way to the Middle East.
There has also been no announced change to the security situation in the Middle East. The US blockade of Iran’s oil exports continues. Reports emerged this morning of three tankers struck in the Middle East Gulf.
The President retains significant freedom in the foreign policy arena. He will be encouraged to exercise this freedom over the next two months before the newly-elected Congress takes office.
A Democrat-controlled Congress is likely to hamper Trump’s domestic agenda over the next two years, but control of the military is within the purview of the President. Any move by Congress to restrict military funding might be difficult. Congress will be wary of spending cuts while troops are in a conflict zone.
Iran’s future role in the Strait of Hormuz will be challenging to resolve diplomatically. Any concession by the US that gives Iran control over Hormuz is likely a nonstarter, both for Gulf oil producers and the US.
Trump’s key advisors appear to be split on next steps in the Iran conflict. JD Vance and Marco Rubio are pushing for negotiation. Pete Hegseth is pushing for maintaining military pressure on Iran to be in a stronger negotiating position.
While Trump himself agrees with Vance’s that the election defeat was caused ‘largely’ by the Iran war. But he also says he would do it all again, to deny Iran nuclear weapons.
A peace settlement between the US and Iran would ease the freight risk premium and unwind most of the inefficiencies supporting tanker rates, including the Hormuz shuttle system. But we think we are long way from reaching any settlement.