In the last few days of last week, product tankers rates firmed both East and West and in some cases, considerably. The question arises, said Gibson Shipbrokers in last week’s market report, whether this recent firming is the start of a more sustainable trend or merely a short-term blip.
Great faith was placed in IMO2020, particularly in terms of its impact on distillates trading. However, can owners still realistically expect this seismic event to transform prospects in the clean tanker sector over the coming months?
To answer this question, Gibson said that it was important to look at how expectations for demand for the different types of compliant fuels have evolved since the convention was first ratified back in 2016.
Initially, it was thought that marine gasoil (MGO) would offer the primary route to compliance in the early days of 2020, and with a surge in demand for gasoil, clean product tankers would stand to benefit from increased trading opportunities - a theory which is still valid.
However, the supply of 0.5% fuel oil (VLSFO) appears to be improving, with an ever-increasing number of suppliers now offering the fuel on a regular basis. If more VLSFO becomes available than originally thought, it would seem logical that MGO demand growth expectations might need to be pared back.
Even if VLSFO supply does exceed initial expectations, industry estimates still point towards an increase in MGO demand of 1-2 mill barrels per day, with gasoil and other blending components shipments still supporting trade.
What is unclear is the impact on tonne/miles in terms of how much product will be traded long haul versus retained locally for bunkering. Increased products trading activity around IMO2020 should be a supportive, even if it isn’t obvious just yet, Gibson said.
Fleet supply factors are also likely to have an impact. Not only have newbuilding product tankers been a constant factor this year, but so have the newbuilding crude tankers entering the clean products market on their maiden voyages. A bullish crude tanker market is likely to deter this activity in the short term.
The recent strength of the crude market also attracted a number of product tankers to ‘dirty up’, which may constrain product tanker fleet supply and thus support clean freight rates. A key factor weighing on product tanker demand is world oil demand, which has been revised downward on a numerous occasions and could be trimmed further.
Today, demand is forecast to average 1.3 mill barrels per day in 2020, which if it comes to fruition, will be a modest increase from this year’s 1.1 mill barrel growth rate.
Furthermore, with IMO 2020 driven distillate demand potentially growing at a faster rate than total oil consumption (due to contractions in fuel oil use), product tankers may largely be insulated from any slowdown in overall demand.
Finally, on the refining side, higher refinery runs are expected for the remainder of the year and into 2020, notwithstanding some seasonal maintenance.
Refining runs for May to July this year fell versus the same period of 2018 but are expected to firm substantially over the coming quarter, growing by 1.4 mill barrels per day year-on-year.
Thus, a strong end to the year in terms of refining runs, the implementation of IMO2020 and the potential for more favourable fleet supply conditions could all support product tankers towards the end of 2019 and into 2020, Gibson forecast.