Two Months of Hormuz Closure: A Mixed Picture for the Liquid Bulk Market

The Strait of Hormuz has been effectively closed for the past two months with no signs of returning to normalcy anytime soon. All segments across the liquid bulk shipping market have been heavily impacted, but the volatility of spot freight rates is diverging into vastly different scenarios.

To assess this divergence, maritime research firm Lloyd’s List compared the index change rates across four main segments: Very Large Crude Carriers (VLCC), midsize crude tankers, product tankers, and Liquefied Petroleum Gas (LPG) carriers.

Under a typical geopolitical disruption model, freight rates experience an initial panic-driven spike, followed by a pullback. However, the current scenario is proving to be much more complex.

Very Large Crude Carriers: Cooling Down After the Fever

The current rate pattern for VLCCs mirrors the early days of the Russia-Ukraine war, where small and midsize tankers recorded better performance than VLCCs.

The Baltic Exchange’s time charter equivalent (TCE) index for VLCCs on the West Africa-to-China route has surged 150% since mid-February. It peaked on March 3, touching $275,369/day. However, this level quickly plummeted as many VLCCs repositioned to the Atlantic basin and market sentiment cooled.

Since mid-March, the index has stabilized around the $100,000/day mark.

Midsize Crude Tankers: Outstanding Growth

In stark contrast to VLCCs, the Baltic Exchange’s Suezmax index (averaging the Black Sea-to-Mediterranean and West Africa-to-North Europe routes) did not pull back in mid-March but continued to climb sharply until the end of last month.

The Suezmax index peaked on March 26 at $279,748/day, a 200% increase compared to mid-February, before sliding in April. Nevertheless, as of now, rates remain 28% higher than pre-war levels.

Midsize crude tanker rates are being strongly supported by massive crude export volumes from the US to Europe, primarily via Aframax vessels, as well as long-haul voyages from the Atlantic to Asia through the Panama Canal's Panamax locks.

Product Tankers: The Best Performers

While midsize crude tankers outpaced VLCCs, product tankers recorded an even more impressive performance.

The Baltic-published Atlantic basin index for Medium Range (MR) and Handysize tankers only peaked in mid-April. Atlantic route rates experienced a threefold surge, climbing from $35,000/day in mid-February to a record peak of $112,755/day on April 13. By last Thursday, although the rate had retreated to the $75,366/day threshold, it was still practically double the pre-war level and up a staggering 193% year-over-year (YoY).

The primary drivers are robust demand for diesel, gasoline, and jet fuel across Europe, South America, Africa, and Asia, compounded by longer voyage distances.

Very Large Gas Carriers: An Upstream Comeback Driven by Bottlenecks

The VLGC segment paints an entirely different trajectory. Using US LPG supplies to offset the shortfall from the Middle East Gulf (MEG) is impossible due to terminal capacity constraints in the US Gulf. In theory, this leads to an oversupply of tonnage (many VLGCs but scarce cargo).

Initially, the US Gulf-to-Japan VLGC index plummeted following the outbreak of the conflict, dropping from around $75,000/day to $38,171/day on March 11. But an unexpected twist occurred: from the second half of March through April, US Gulf VLGC rates staged a sharp recovery.

By last Thursday, the index hit $142,889/day (more than triple the pre-war rate and up 276% YoY)—the highest TCE rate since the Panama Canal drought crisis in September 2023.

Explaining this incredible rebound, Clarksons Securities pointed to widening arbitrage—the price spread between US Mont Belvieu propane and Asian prices expanded from $250 to $300/ton—and market inefficiencies.

In its report, Clarksons highlighted a localized vessel shortage: "A significant portion of the [VLGC] fleet has traditionally focused exclusively on the Middle East market and has not previously carried US cargoes, meaning [the ships] did not have US Coast Guard approval for US loading."

"This application process is understood to take at least five to six weeks, which has limited VLGCs that would otherwise be available because of limited Middle East export flows."

"It is unclear how many VLGCs have applied for US Coast Guard approval, but some estimates suggest that as many as 50 have applied."

Furthermore, capacity limits at the Neopanamax locks (Panama Canal) are becoming a major hurdle. Mega containerships are dominating transit traffic, pushing waiting times for unbooked vessels to an average of 7.9 days southbound (Atlantic to Pacific).

Consequently, canal transit slot auction prices have exploded. According to Argus, the average auction price at the Neopanamax locks reached $1.7 million during the week ending April 17, the highest weekly average since Argus began collecting this data in January 2024. Notably, one April auction slot hit $4 million (matching the record high seen during the November 2023 drought period).

In summary: The supply chain is stretched to its absolute limit. Increasing volumes of US LPG are being forced to take the longer route around the Cape of Good Hope. The voyage from Houston to Japan via the Panama Canal is already 43% longer than the MEG-to-Japan route; taking the Cape of Good Hope extends this distance to 2.4 times longer.

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Source: Phaata.com (According to Lloyd's List)

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