Product tankers - positive signs on the horizon

Apr 13 2018

Undoubtedly, 2017 proved to be a very difficult year for the product tanker market, with earnings sinking to multi-year low.

This occurred on the back of rapid fleet growth in the larger product tanker segment, limited arbitrages, due to high product stocks and no large-scale growth in demand in key loading areas, Gibson Shipbrokers said in a report.


Will this year be any different and when do we expect to see a rebound in industry earnings?


The first quarter of this year showed mixed results. MRs continued to outperform LR1s and LR2s, with average TCE earnings for the first three months of 2018 both in the East and in the West being slightly above the returns for larger product carriers on benchmark trades out of the Middle East.


MRs have started to find support from the slower fleet growth, a consequence of restricted ordering since 2014; robust intra-Asian trade and incremental demand into West Africa and Latin America are also helpful.


In contrast, LRs began January at their lowest level for many years; yet, over the following two months earnings gradually firmed close to their highest level seen over 12 months, as Middle East refineries gradually came back on stream from scheduled maintenance.


MR fleet growth is expected to remain restricted in the short term. So far this year, 15 units have been delivered and another 55 are scheduled for delivery over the remainder of 2018.


If a degree of slippage is seen, this year’s MR fleet growth is likely to mark one of its lowest levels this decade, particularly if demolition activity remains as robust as it was in 1Q18, with 14 MRs reported sold for demolition.


This, coupled with the positive Asian demand signals, as well as Latin America and West Africa, is likely to offer further support to the MR market in 2018. However, deliveries in the larger product tanker fleet will remain at elevated levels, although not as high as those seen in the previous two years.


Since January, seven LR1s and eight LR2s have been delivered and another 11 and 12, respectively, are scheduled for delivery for the rest of the year. The LR2 market could also be challenged by migration from the dirty segment, as earnings in the Aframax market in recent months dipped.


However, demand for all product carriers could benefit if the recent declines in product inventories in some regional markets stimulate arbitrage movements, Gibson said


On balance, although some positive signals are being seen for MRs, any gains in the short term are likely to be limited, capped by continued robust growth in the LR fleet and the likely migration from the dirty segment if clean tanker earnings continue to offer relatively better returns.


In the longer term, prospects are for a more substantial and sustainable recovery in the market.


On one hand, approaching legislation in terms of the ballast water treatment and the 2020 Global sulfur cap on marine bunkers could lead to a notable increase in demolition.


Large scale refining capacity expansion in the Middle East between 2019 and 2022 is also likely to offer a big boost to product trade, driven by product imbalances. Product tanker demand could find additional support if the implementation of sulphur cap on bunkers translates into an emergence of new trades for compliant marine fuel, Gibson concluded,


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