Suezmaxes hopeful of seeing a recovery

Apr 18 2019


Like all the other crude tanker segments, Suezmax rates have been on a roller coaster ride over the past six months.

Earnings surged in the fourth quarter of last year, in part due to major Turkish Straits delays and marginal fleet growth.

 

Of course, other factors were at play, such as higher Middle East/Russian crude exports in the fourth quarter of last year, prior to the re-imposition of the production constraint, Gibson Shipbrokers reported in a market report.

 

The picture now is very different. Earnings on benchmark routes in the Atlantic Basin declined steadily during the first quarter of 2019, averaging close to OPEX levels in March.

 

Once again, the decline was triggered by a combination of factors. Turkish Strait transit delays eased gradually, as the weather improved. In West Africa, exports were hit both in January and February, mainly due to lower shipments out of Angola. Cuts in crude exports out of the Middle East also had negative implications.

 

While trading demand has came under pressure, fleet size increased. According to Gibson’s records, 19 Suezmaxes were delivered during the first quarter of this year but just one tanker was reported sold for demolition.

 

The picture is similar for VLCCs and Aframaxes/LR2s. There were no demolitions in these size groups in 1Q19; however, 20 VLCCs and 28 Aframaxes/LR2s were delivered.

 

Despite the poor conditions at present, fleet prospects for Suezmaxes look more balanced for the remainder of 2019. Only 12 tankers are scheduled to commence trading, while the market could also see some units being demolished.

 

There are 21 Suezmaxes currently operating that are over 20 years of age, plus another 11, which will celebrate their 20th birthday this year. With testing market conditions for modern tonnage, trading environment for ageing ladies must be even more challenging, increasing the appeal of demolition.

 

In contrast, more deliveries are planned in the VLCC and Aframax/LR2 segments. Here, 54 and 27 tankers, respectively, are scheduled to start trading by the end of 2019.

 

The near-term earnings outlook also depends on demand prospects. About half of all Suezmax spot fixtures originate out of West Africa and the Black Sea/Mediterranean. In addition, about a quarter of trade comes out of the Middle East.

 

As the largest crude exporters in these regions are OPEC members or countries participating in production cuts, Suezmax trade prospects are largely linked to future OPEC/non-OPEC output policy decisions. Although the official OPEC rhetoric does not indicate an increase in output anytime soon, firmer oil prices due to sanctions and escalation of conflict in Libya certainly support an argument for higher production.

 

Last week, OPEC admitted that production cuts and involuntary declines in Venezuela and Iran pushed the oil market into deficit last month. More importantly, the call on OPEC is likely to intensify substantially in the second half of this year, once global refinery turnaround season is complete, as refiners ramp up crude runs ahead of the IMO 2020 and new refineries begin full scale commercial operations.

 

Higher demand for crude will benefit all crude tankers, not just Suezmaxes,  however, healthier supply fundamentals for this size group may offer a little bit extra, Gibson concluded.

 



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