Global oil demand growth to slow - McQuilling

Feb 11 2019

In 2018, global tonne/mile demand to transport crude and residual fuels increased by 1.9%, supported by a 1.4% increase in VLCCs, which accounted for 63% of the total demand for dirty tankers.

Suezmax demand accounted for 25% of all DPP demand in 2018, 1% higher than 2017, due to higher crude exports from the Southern Europe and North Africa loading region, according to McQuilling Services ‘2019-2023 Tanker Market Outlook’. 

Crude pricing differentials initially favoured long-haul flows from West to East; however, a surge in Middle East supply to re-establish baselines transferred crude volumes back to the Arabian Gulf, drawing Asian ballasters away from the West and exploding transatlantic demand for US crude oil. 

Middle East crude supply averaged about 160,000 barrels per day higher year-on-year, supporting volumes to the East, while demand for Arabian Gulf/West remained under downward pressure, a trend forecast to continue. 

Transportation demand for refined products increased by 0.4% year-on-year in 2018 amid a 3% rise in LR2 demand, while the remaining vessel sectors experienced lower demand, due to declining volumes transported in the LR1 sector and lower mileage travelled in the MR2 sector. 

As mentioned, LR2 tonne/mile demand increased by 3% in 2018, broadly in-line with McQuilling’s January, 2018 prediction of accelerating growth as the revival of the Middle East/Northern Europe gasoil and jet fuel trade supported demand. The tonne/mile demand estimates show growth of 25% year-on-year for this trade, accounting for 13.4% market share.

During 2018, McQuilling counted 106 dirty tankers and 35 product + IMO III tankers delivered to the trading fleet. VLCC deliveries decreased relative to 2017 with 39 vessels observed last year similar to Suezmaxes, which saw 32 additions. 

On the clean side, 16 LR2s, 12 LR1s and seven MR2s were recoded as joining the fleet. 

The number of vessels that exited the fleet last year matched within 1% of the January, 2018 projections, as 134 ships were sold for demolition or conversion, compared to the original forecast of 133. 

VLCC removals totalled 35 in 2018, while Suezmaxes and Aframaxes came to 22 and 37 vessels, respectively. On the clean side, 32 vessels exited the trading fleet in 2018.   

Newbuilding ordering activity decreased 20.5% year-on-year in 2018 within the DPP sector amid tempered interest in the VLCC and Aframax segments, particularly in the second half of the year. 

In 2017, 62 VLCCs were ordered, which fell to 43 in 2018. Suezmax orders remained flat at 25 vessels, while Aframax orders decreased to 32 vessels.  

Clean tanker ordering activity through 2018 represented a 14.3% increase in comparison to the previous year with 18 LR2s and eight LR1s contracted.  In the MR2 segment, ordering gained 17% year-on-year with 76 vessels in 2018, while the MR1s observed less activity at 10 vessels.

World economic growth decelerated in 2018, falling to an estimated 3.7% versus 3.8% in 2017. According to the International Monetary Fund (IMF), GDP growth is expected to temper to 3.5% in 2019, a downward revision, due to trade tensions between key nations and European political uncertainty. 

Global oil demand growth is likely to slow over the forecast period, down to 860,000 barrels per day this year before falling further to just 394,000 barrels per day by 2023. 

Crude supply growth is also projected to slow down, rising by 830,000 barrels per day in 2019, due to downward pressure from OPEC production cuts, offset by gains in North American and European output.

Crude and residual fuel tonne/mile demand is forecast to increase by about 0.9% on an annual basis throughout the period under review with a decelerating trend observed in the latter years. 

McQuilling forecast a 2019 demand growth of 1%, as participants in the OPEC and non-OPEC production cut agreement limit crude output from the Middle East, somewhat counteracted by higher exports from the Atlantic Basin.

An annualised growth of 2% and 2.3% for the LR2 and LR1 sectors is forecast, respectively through 2023 and just below 1.6% for MR2s.

Total DPP 2019 deliveries are estimated to be 134, before falling to 102 in 2020, which will begin to support a freight rate recovery in the context of increasing deletions over the next two years. 

The consultancy’s projections indicate that 58 product tankers will join the trading fleet in 2019, partially offset by 39 deletions, while beyond this point there will be a greater contraction in the fleet. 

On the chemical side, the delivery schedule for IMO I + II tankers increases to 74 vessels in 2018 before dropping to 58 vessels the following year.

On the basis of supply side pressure, as well as demand indicators pointing to decelerating growth, freight rates this year are expected to appreciate marginally; however, support for TCEs will stem from lower bunker prices with VLCCs averaging $26,800 per day and Suezmaxes averaging $18,800 per day. However, a much tighter balance for VLCCs is seen for 2022 with earnings climbing to $33,700 per day.

The story is quite different on the clean segment, as supply fundamentals improve with growing demand earlier in the cycle. Spot market earnings in the LR2 and LR1 sectors are projected to average $17,100 per day and $16,700 in 2019, respectively. MR earnings on a round trip basis are, in general, expected to rise this year with TC2 TCEs averaging $6,600 per day; however, higher earnings of $14,500 per day can be attained on the basis of the Atlantic Basin triangulation.  

Potential for supply side pressure on clean freight rates becomes evident in in the back-end of the forecast period based on analysis of McQuilling’s new long-term delivery forecast methodology. 

In the analysis, the relationship between timecharter rates and spot market earnings was strong and formed the foundation for the timecharter forecasts. For VLCCs, one-year and three-year timecharter rates are projected to average $31,500 per day and $32,000 per day in 2019, respectively. 

The 2019 price forecast for the five-year old crude tanker sectors sees VLCC values averaging $66.1 mill, a 5.4% increase from the 2018 average price of $62.7 mill.  Modern Suezmax tankers are forecast to demand $45 mill in 2019 with further appreciation to $56.1 mill in 2023.

Clean tankers in this five year age group are expected to see higher prices relative to their 2018 averages. For the LR2 segment, a 2019 forecast average price of $37.8 mill is seen, a 5.2% increase from the average price recorded in 2018, while the LR1 sector is expected to see larger gains of 14% year-on-year to average $32.7 mill. MR2s are  likely to appreciate 15% to 30.7 mill in 2019.

In the 2019-2023 Tanker Market Outlook, McQuilling has incorporated a variety of new features to provide a more robust view of global trade flows and major tanker trades. These include:

§  Enhanced utilisation of remotely-sensed vessel position data to capture fleet growth in terms of newbuilding deliveries and vessel deletions.

§  Refined methodology in forecasting global bunker prices using forward product cracks relative to a projected Dated Brent crude outlook.

§  Investment analysis providing insight into the projected unlevered returns for each tanker sector with discussion on the financial benefit of scrubber economics as well as an ‘Efficient Frontier’ analysis, displaying various hypothetical portfolio enhancements an owner can employ when managing assets.

§  Addition of the Aframax 70,000 tonne USG/UKC trade to the freight rate forecast table expanding the coverage to 14 dirty and 10 clean tanker trades.

This 200-page report provides a five-year spot and TCE outlook for eight vessel classes across 24 benchmark tanker trades, plus four triangulated trades. 

Also included in the report is a five-year asset price outlook, as well as a one and three-year timecharter rate forecast through 2023.  

Last year, the forecasts were within 10% of actual market levels, McQuilling claimed.

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May 2019

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