Higher rates can’t hide weaker tanker demand

Regional disruptions are redrawing tanker trade flows — creating longer, more complex routes that boost ton-mile demand and support freight rates. Oil-on-water volumes — a key measure of tanker requirements — fell to 1.07 bn barrels in April from 1.24 bn barrels in January, according to S&P Global Commodities data.

Alternative routes are cushioning the blow but not replacing lost volumes: Tanker operators indicate that certain displaced Gulf exports have been rerouted onto longer-haul routes, including higher Saudi crude shipments from Yanbu, the release of Russian barrels previously stored at sea, and inventory drawdowns. These shifts have supported ton-mile demand and freight earnings, but they have not come close to offsetting the collapse in flows through Hormuz.

Freight rates remain elevated, but the underlying market is weakening. The Platts VLCC benchmark stood at USD 278.7k per day by the end of May, well above the USD 75.9k per day average since the index launched in March 2024.

Could trade inefficiencies outlast the conflict? They might. The industry is likely to embed some of the new trade patterns even after hostilities end, Frontline CEO Lars Barstad notes. Yet the longer disruptions drag on, the more the market's underlying weakness comes into focus, as excess vessel supply continues to weigh on tanker demand.

Base case versus worst case: Bimco’s worst-case scenario — which assumes disruptions continue through 2026 and 2027 — projects that crude tanker demand could contract by 11-13% next year and by a further 8.5-10.5% in 2027. Even under its base case, which assumes the strait reopens by the end of this month, crude tanker demand is expected to fall by 4-6% in 2026 before recovering in 2027.

Product tankers face an even steeper challenge: Fleet growth continues to outpace cargo demand, leaving the segment particularly exposed. Higher freight rates may provide temporary support, but they are unlikely to offset a structurally weaker supply-demand balance.

Why this matters: Oil-on-water metrics measure the volume of crude and refined products currently floating aboard tankers, whether in transit to buyers or held offshore in storage. More barrels on the water typically mean more ships are required to move them. The recent decline suggests that, despite the longer trade routes and elevated freight rates created by the disruption, fewer barrels are actually moving through the global tanker system — a warning sign for vessel demand if the disruptions persist.