These have negated the conditions that usually boost long haul trades, said BIMCO in analyst’s Peter Sands look at the tanker market.
He expressed surprised by the almost non-existent tanker seasonality, where freight rates usually peak during the colder months in the Northern Hemisphere - from November to January.
For VLCC spot earnings, 2017 was the worst year since 1994. Average earnings of just $17,800 per day meant money was lost daily. Suezmax earnings averaged at $15,829 per day and Aframaxes earnings averaged $13,873 per day, the report said.
Despite China increasing its importance in the oil market, generating much tanker demand growth, becoming the largest importer in 2017 (exceeding the US in April), freight rates remained dismally low.
China increased its imports by 10% (by volume) in 2017, from the year before, and much of the oil came from long haul shipments. However, this demand boost wasn’t enough for the overall market to improve.
This brings the attention back to the rebalancing of the global oil stocks, and to the question of what is the future ‘right level’ of global crude oil and oil product stocks going forward? A return to the absolute stock levels of 1st July, 2014, does not seem to be the target.
Consumption rose from 93.9 mill barrels per day in mid-2014 to reach 99.3 mill barrels per day by December, 2017. As consumption rises, stocks are likely to follow suit.
Stock levels are often measured by ‘days of supply’ – giving an indication that accumulated stocks equal to +1 mill barrels per day maybe one target point to watch out for.
According to the US Energy Information Administration (EIA), the implied stock changes to the world liquid fuel balance in the first quarter of this year showed a drawdown of stocks, for the fifth consecutive quarter. Overall, stocks have increased to the equivalent of 2.9 mill barrels per day since mid-2014, when crude oil prices started to decline rapidly. For 2018 and 2019, EIA forecasts a modest inventory build up.
The drawdown of stocks is measured as a ‘flow’, ie the difference between oil production and oil consumption in mill barrels per day and not as an absolute in mill tonnes.
Since November, 2016, when OPEC and non-OPEC producers agreed to deliver a co-ordinated cut in oil supply for the first time, global stocks have declined. Despite this, stocks remain significantly above the level they were before oil prices started to drop, inspiring large-scale stockpiling during 4Q14 - 1Q16. The deal to cut oil output runs until the end of this year.
So why is it that global stocks do not continue to decline? The short answer is because US oil producers, who are not party to the supply cut agreement, are increasing their output from 9.3 mill barrels per day in 2017 to a forecast 10.3 mill barrels in 2018, Sands said.
Output reached 10 mill barrels per day in November, 2017. From a tanker perspective, the uncertainty surrounding global oil supply adds another layer of unpredictability to the market.
Regardless of the talk about alternative sources of energy – oil demand continues to increase. The IEA forecasts global oil demand will grow by 1.3 mill barrels per day in 2018. Potentially breaking the 100 mill barrels per day barrier during 4Q18.
A four-year high overall demolition figure was not enough to prevent the freight market from stagnating, as the crude oil tanker fleet grew by 5.1% and the product tanker fleet grew by 4.2% in 2017.
Sands said that it expected the number of ships leaving the fleet for recycling to go down slightly this year. This is due to a lower level of newbuilding deliveries and expectations of slightly improved demand growth in the second half of this year.
For 2018, the BIMCO report forecasts slightly higher fleet growth, on the back of the factors mentioned. We are now expecting the crude oil tanker fleet, as well as the oil product tanker fleet, to grow by 2.5%, Sands said.
Fleet growth estimates are quite sensitive to demolition forecasts – which in turn are very sensitive to freight rate developments. This year has already seen 0.5 mill dwt of oil product tanker tonnage and 1.1 mill dwt of crude oil tanker tonnage being demolished (including two VLCCs to the end of January). As the year progresses the pace is expected to slow.
For 2018 deliveries, the VLCC sector (with 734 ships at the end of 2017) will see some 30 units launched. In the product tanker sector, the MR fleet (with 1,387 ships at the end of 2017) will see up to 40 MR-workhorses entering the fleet this year.
One of the volatility factors to watch out for in the crude tanker market is the amount of capacity being used for floating storage. Depending on the number of newbuildings delivered, a huge increase in the use of tankers for floating storage could deliver a ‘virtual’ decline in the operating fleet size. This in turn affects the freight market balance in a positive way – at least temporarily. Even though gross delivery of crude tankers in 2018 will be lower than last year – the level of floating storage will also be lower.
According to McQuilling Services, less than 20 VLCCs are currently being used for floating storage. This is due to the oil market backwardation (future price of oil being below the spot price), which does not encourage the storage of oil, at sea or on land, until contango (future price of oil being above the spot price) returns on a more permanent basis. Floating storage at current levels has no impact on the freight market.
The future of oil demand and subsequently of tanker demand is very much policy driven. It was in the past to some extent, but in coming years, this will become more apparent.
The impact of policy can be seen in many forms. Such as:
1) The building of strategic petroleum reserves in the US, China and India - those that can afford it.
2) The resumption of crude oil exports from the US in early 2016.
3) Rapidly increasing refinery capacity in the Middle East.
Next in the line of policy driven changes, which could have widespread impact, particularly on tanker market, comes from the industry itself. The 2020 fuel sulfur cap is a huge issue, not just in terms of the uncertainties surrounding fuel availability and compliance, but also in terms of the positive knock-on-effect on shipping demand but also the negative and inevitable higher cost of bunkers.
BIMCO’s report stressed that more questions were being raised by the day.
For example, will there be a sufficient amount of compliant low sulfur marine fuel available from 1st January, 2020? Even if there is, how much of this compliant fuel will require large scale redistribution from the production area to the bunkering hubs? Will there be a requirement to refine and stockpile compliant fuel ahead of 1st January 2020 - if yes how much?