Overview

With a considerable number of crude tankers believed to be engaging in shadow trading, the segment is currently facing an abnormal situation, which requires fresh data interpretation to illustrate the impact.

While great care regarding accuracy has been taken to quantify this shadow trade, it’s still impossible to know with exact certainty. In essence, we are counting what is not being reported.

We will use historical data going back to 2018 in an effort to show the development of this shadow trade and the consequent impact on the known trading market up to this point in time. The year 2018 was chosen because it was the last (nearly) full year before US sanctions directed at Iran were reimposed in November.

But to know what isn’t being reported, we must go back even further to establish how many vessels were deemed able to trade but failed report trading activity. To do this we are using a historical data of non-market participation, measured by the number of known live vessels and those not reporting a journey. After a background average of non-market participation (no reported journeys) among live vessels for each class is established using 2012-2017 as a guide, we are then assuming that any increase in live vessels reporting no journeys could be attributed to the shadow trade.

A six-month increment was used for data collection to allow even the longest haul to be completed and a new cargo loaded, ensuring that each vessels had the chance to be counted in the data for active vessels over that time. This six-month period also ensured that even during times of dismal fleet utilization or port congestion, which could see wait times for cargoes increase, all active vessels still had ample time to participate in the market.

VLCCs

For the VLCC class, we have established a background (2012-2017) non-market participation rate among live vessels of approximately 2%. That 2% is therefore not counted when determining the percentage of the suspected shadow fleet, as it’s considered a pre-existing market condition.

To be clear, in the VLCC chart below, H1 of 2018 there was a non-market participation rate of 3.08%. After removing that 2% historical average we show a 1.08% departure.

Starting in 2018, we see only slight levels of what could be shadow trading, though it’s also well within the margin of previous market variations making it statistically inconclusive.

However, the second half of 2019 saw a measurable jump in perceived shadow trading activity, encompassing approximately 3.67% of the fleet. This figure is well outside previous variations making it statistically significant.

The latest data implies approximately 6.17% of the fleet participating in shadow trading, which is the second highest reading over the 10 years examined, behind H2 2021.

This is important since these vessels are still counted among the fleet but are not contributing to total cargo miles recorded, creating the perception of a more significant supply/demand imbalance.

The largest drop in reported cargoes occurred in the age range between 15-25-years-old, with the numbers of participants dropping roughly coinciding with number of vessels emerging in the shadow fleet. This suggests that shadow trading is primarily composed of vintage vessels. Furthermore, their age suggests that these vessels are now permanently relegated to the shadow trade, especially as the EEXI looms.

Therefore, these vessels should be removed from the equation which factors in reported cargo mile demand totals. 

Suezmax

For the Suezmax class, we have established a background (2012-2017) non-market participation rate among live vessels of approximately 1.5%.

Notice that through H1 of 2019 variations were small and well within the margins. However, it was H2 of 2019 where we witnessed a sustained jump which tested the limits of previous short-term statistical variations. This finally gave way to measurements well outside previous readings making this statistically significant both in magnitude and duration.

Aframax

For the Aframax class, we have established a background (2012-2017) non-market participation rate among live vessels of approximately 2.3%.

The Aframax class is experiencing the least amount of shadow trading discernable, with just over 1% possibly engaging in the practice. This is likely due to the parties involved in the trade which prefer larger tonnage, or perhaps the fact that the legitimate Aframax market is doing fairly well.

Conclusion

The shadow trade is being conducted primarily through the VLCC and Suezmax classes, with little participation from the Aframax fleet. When taking capacity into consideration, VLCCs would obviously compose the vast majority of shadow trading.

Given the ages of the vessels failing to report a journey but are still considered live, it’s quite possible that much of this shadow fleet will never return to legitimate trading.

Though it seems highly unlikely at this point, but if sanctions are suddenly and sternly enforced, this would present a major step forward in rebalancing the Suezmax and VLCC markets.