Tankers - What will the winter bring?

Oct 05 2018

Winter usually brings stronger earnings and higher freight volatility to the tanker sector.

However, the winter of 2017/2018 was a disappointment across all sectors, despite it being particularly cold in the Northern hemisphere.

As analysts, this has made forecasting the 2018/2019 season all the more challenging, Gibson Shipbokers said.

The reasons for last winter’s downturn were numerous, including OPEC production cuts; stock drawdowns, which prompted lower demand for seaborne crude trade; and rising tanker supply, among other factors.

So how is this winter likely to shape up? Will we see a demand driven spike? Will winter disappoint? Will weather delays come to the rescue, regardless of the fundamentals? Will tanker supply blunt any rally before it really gains any momentum? Only time will tell, Gibson said.

In analysing the fundamentals, this could give some owners reason to be more positive this year.

Focusing on tanker supply, the Aframax/LR2 fleet stood at around 1,014 vessels 12 months ago, compared with 1,013 today, hardly changing. The picture is similar for VLCCs and not much different for Suezmaxes, with the fleet having grown by 15 vessels over the past 12 months in the latter segment.

Generally speaking, the supply side looks stable heading into this winter - a reason to be more optimistic, relative to last winter, Gibson said.

Tanker demand is more difficult to predict and is further complicated by the Iranian sanctions situation. Yet, with oil stocks near normal levels, any incremental increase in demand will have to be met from extra trade flows, most of which are expected to be seaborne.

Given that the IEA forecasts a surging world oil demand in the fourth quarter of this year to a record 100.3 mill barrels per day, crude carriers could be set for a seasonal boost, Gibson said.

Due to current voyage lengths, VLCCs have already felt the benefit to a certain extent, as higher Chinese refinery demand has supported this market sector to fully make use of their import quotas and Iranian uncertainties.

Whether the VLCC sector can maintain its momentum in 4Q18 depends in part on how robust the buying activity remains and how the lost Iranian barrels are sourced, as the more Iranian crude the Chinese consume, the less the internationally controlled VLCCs benefit.

Thus far, OPEC has indicated that production will remain flat, which if true, means that Asian refiners will source more of their crude form the Atlantic Basin, supporting tonne/mile demand and VLCCs in particular.

Evidence has already emerged of stronger Chinese buying of West African grades, whilst South Korean, Japanese and Chinese buyers have tapped into the US market. Potentially, this points to more barrels being shipped on VLCCs, rather than Suezmaxes but it is also supportive for the whole crude tanker sector.

Aframax owners also have reason to feel more confident about the coming winter season, Gibson said.

Whilst Iranian sanctions should be marginally beneficial for all crude tanker segments, Aframaxes could be the primary beneficiaries. Without additional OPEC/Russian supplies, the focus will be on trading crude already in play.

Given that Europe and the Mediterranean is expected to lose 600-700,000 barrels per day of Iranian crude, local grades will benefit from higher regional demand, which could support short sea Aframax trades.

Similarly, Aframaxes will continue to see higher demand in the US Gulf, for both lightering and conventional trading, as US crude remains one of the key sources of supply in the medium term.

Overall the biggest wild card for winter concerns the weather. Reports emanating from the UK recently suggested that Europe is braced for its harshest winter since 2010.

Whether this occurs remains to be seen. However, the story for this coming winter looks a bit more promising than it did 12 months ago, Gibson concluded. .





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