Kpler, BIMCO and Gibsons on tanker recovery

Oct 29 2021


Kpler, BIMCO and Gibsons shared their views on whether tanker markets are on the road to recovery, on a Jul 27 webinar organised by Reuters Events.

Are tanker markets on the road to recovery, and what are the biggest factors which will have an impact from now? Speakers from commodity data and analytics company Kpler, shipbroker Gibsons and shipping association BIMCO shared their thoughts, in a July 27 webinar organised by Reuters Events.

 

Matthew Wright, senior freight analyst with commodity data and analytics company Kpler, said that the answer begins by looking at demand for crude oil in China.

 

We saw a steep growth in Chinese crude inventory in 2020, which has been declining so far this year, but “there’s still quite a way to go. We've not seen a huge draw down. Stocks have been rising even with imports at relatively low level.”

 

There are questions over how much oil China will demand in future, with many independent refineries cutting the amount of crude they process.

 

There are signs that the Chinese government is looking to crack down on oil imports, partly to achieve climate goals.

 

High land inventories “are the enemy of the tanker sector,” he said. If the market gets ‘backwardated’ (with futures prices lower than present day prices), companies choose to take supply from their stores, rather than new deliveries by tanker.

 

However with inventories getting drawn down, there will come a point where refineries are forced to buy seaborne oil.

 

Oil supply

The need for crude tankers is also driven by the global supply of oil. Here we have only seen “relatively modest” increases up to July 2021, then there was an agreement by OPEC to increase production by just 400,000 bopd.

 

It is not yet certain whether this oil will be exported, it may be used by Middle Eastern countries such as for power generation.

 

So the shipments in 2021 “is not the most exciting number. By the end of the year loading should be higher than where we currently are. For next year - a higher average for the year, which is what the crude tanker market needs.

 

The main contribution to the increase will come from OPEC production. “There will be some increase in [US] shale growth - but not necessarily high as it would have been a couple of years ago.”

 

Clean shipments

In terms of clean tanker shipments (refined products), looking at medium range tankers (MRs) “which account for over 50 per cent of clean product flows.”

 

Mr Wright sees this in two separate markets, West and East of the Suez Canal.

 

Before the pandemic, demand for MRs East of Suez was increasing, but collapsed during the pandemic, with some spikes from vessels used in floating storage.

 

Southeast Asia is a “huge net importer” of products, including products refined in the Middle East and China, Mr Wright said. “In January to March we saw pretty steady growth.”

 

The concern with India is the high Covid numbers, and we don’t know when it will come out of the current spike in Delta Covid cases.

 

Chinese product exports “really look like they are going to be on the decline for a little while. We're expecting to see export quotas slashed quite significantly. It may be only 40m tonnes, 20m tonnes less than last year,” he said.

 

“Whether that's around Chinese governments' ambitions around energy transition or their wish to control independent [refineries] I’m not sure.”

 

“China didn't have a plan on being exporter, they wanted to be self-sufficient. They just invested heavily.”

 

West of Suez, the Atlantic basin is “proving to be a bit of a stronger market for MRs.”

 

One reason for the difference could be the differing approaches to COVID, with Western countries seeking to live with COVID, and so people still driving cars, and Eastern countries seeking to eliminate it, he said.

 

Looking at the long-haul flows in LR tankers, the imports of naphtha to the Asia Pacific are above 2019 levels, but East to West volumes are yet to recover. European imports are around the 2019 average, but mostly sourced from the Mediterranean and Russia on medium range vessels.

 

Many VLCCs and Suezmaxes are also being used to carry petroleum products.

 

There are VLCCs and Suezmaxes going to West Africa, loading cargo offshore, and going to South America. “That's eating a lot of MR and LR trade - that would otherwise come from Middle East and India. It is definitely opportunistic because of the weak crude [tanker] market.”

 

Floating storage is much reduced now, he said. The volume in storage has reduced from 200m barrels at the peak to 70-80m now, although still above pre-pandemic levels of about 50m.

 

Peter Sand, BIMCO

Peter Sand, chief shipping analyst with BIMCO, noted that tanker freight rates have been lossmaking over the past year.

 

Time charter rates for medium range tankers are at breakeven levels. “If we're seeing any MR time charter deals right now - they are not profitable - they basically cover the cost. We see no time charter for crude oil VLCCs.

 

“The indications are that no-one is a rush to move any cargo soon.”

 

“We see indications from brokers, the one-year time charters for VLCCs are in loss making territory even with a scrubber onboard.”

 

The cause of weak markets goes back to the early 2020 disputes in OPEC, which led to big growth in oil coming onto the market, and a spike in demand for tankers.

 

Tanker operators got “spectacular earnings” in the first half of 2020, particularly the second quarter, at one point earning $100k revenues in excess of costs on a vessel.

 

Owners and investors built up war chests. But this may be preventing them from needing to scrap vessel today, leading to oversupply in the market.

 

But the early 2020 demand will not be repeated very soon.

 

On the issue of high levels of oil stocks in China, Mr Sand said that it is not certain whether they are considered strategic petroleum reserves, an indicator of a fundamentally growing demand, or to ensure that refineries have no interruption to supply.

 

Brazil to China is an important long haul VLCC trade, Mr Sand said. But exports in May 2021 were “horribly low”, June is “somewhat in recovery mode”. For the first half of the year, exports to China were down 10 per cent.  With such long distances, this “puts a lid” on freight rates.

 

Brazil and China have “a longstanding relationship, but a very one-sided one, where China says ‘jump,’ Brazil says, ‘how high.’”

 

To get the tanker markets back up, “we need the long hauls, we need China to take from North Sea, from the Black Sea.”

 

COVID is a major factor in future oil demand. For China and India, which have driven a rise in oil demand over the past years, there are questions about whether future waves of infections will stop the current recovery in demand.

 

For Europe and North America, “we're not going to see pre pandemic levels being breached until 2023.”

 

Long term oil demand may have already peaked in Europe for climate reasons and could have peaked in North America as well.

 

In South America, COVID hasn’t impacted shipping so far very much.

 

Scrapping and newbuilds

BIMCO’s Peter Sand noted that the tanker scrapping market is behaving unusually.

 

There are high scrap steep prices, and too many vessels for the cargoes available, but tanker owners are not scrapping ships.

 

Only an “insignificant” amount of tonnage has been taken out of the crude oil sector, and about 2m DWT taken out of the product sector.

 

One reason is the market for second-hand ships, which can be $2m to $5m more than the scrap value.

 

Gibson’s Richard Matthews said his company has noticed many of these second-hand vessels “sail to the Caribbean and turn their transponder off – then we see them in other parts of the world and see they've been doing Venezuela and Iranian crude.” They are later sold for scrap.

 

“The freight rates offered for this illicit trade, we understand to be, 10 times the current market. It’s attractive for people who want to do it.”

 

There are 55 VLCCs planned to be added to the fleet in 2022, although they are probably going to carry clean products on their first voyage, he said. But then they will be carrying crude, and this won’t help rates. “We're probably not going to see the same number of vessels taken out of the market.

 

However, Mr Matthews noted that tankers will need to be scrapped eventually, and with very few tankers scheduled for delivery in 2023 and 2024, there may be good news for freight rates along the way.

 

“So at the end of 2023, we've got world demand above pre pandemic levels,

no new tankers, the tankers which haven't been scrapped will eventually have to be scrapped, you'll suddenly have a much tighter fleet position.

 

It will probably be around 2023 before they start generating some decent income again.”

 

Long term demand

In terms of longer-term predictions for oil and tanker demand, “I think we are in a safe house for 2025 and also for 2030 to some extent,” Mr Sand said. “I would not be afraid that oil demand evaporates beneath our feet.”

 

China has announced plans for peak carbon by 2030, although that is likely to be much about coal.

 

“That whole climate agenda needs time to get into gear, put that transition thoroughly on the rails. We're still very far away from that.”

 

The growth in renewable energy is not even enough to satisfy the growth in demand, let alone take existing demand away from fossil fuels.

 

“I see a huge demand for energy, putting something of a cushion for shipping of fossil fuels at least into 2030, coal being perhaps the one exception.”

 

Other market changes

Richard Matthews director of research at Gibsons noted that there has been refinery construction East of Suez, leading tanker owners shifting tonnage East. But the increased car driving in the US may eventually lead to more imports by the US.

 

Looking at jet fuel, Gibsons’ Richard Matthews noted that while flows of gasoline are getting similar to pre-pandemic, jet fuel is not. And jet fuel is often transported over long distances, such as Middle East to Europe, or from Asia to the Atlantic. And most analysts do not expect jet fuel market to get back to pre-pandemic levels even in 2022.

 

In terms of jet fuel, we are seeing domestic flights in China and Europe picking up, but long haul still limited, Peter Sand added.

 

Speakers were asked about what it will mean for tankers if US sanctions on Iran are lifted. They said that while more oil in the market is good for tankers, it is not a net benefit if oil from Iran to China displaces oil from the Gulf of Mexico to China.

 

“There's a lot of very old vessels trading Iranian oil,” said Gibsons’ Richard Matthews. “They're only doing that because there's no modern vessels willing to do it” [due to penalties for sanction busting]/

 

Gibsons estimates that 10 per cent of all VLCCs, and 7 per cent of all Suezmaxes, are engaged in Iranian or Venezuelan trade. “If sanctions get lifted, those vessels will not get accepted to buyers of Iranian / Venezuelan oil. So those vessels would get marginalised and taken out of the fleet,” he said.

 

BIMCO’s Peter Sand noted that freight rates usually spike when sanctions are invoked, not when they are lifted. At the moment we are not hearing much about Iran, which could be a sign that diplomacy is working, but could lead to sanctions being lifted.

 

Speakers were asked if they thought there would ever be a large market shipping CO2. BIMCO’s Peter Sand replied that the energy emitted when shipping CO2 could eliminate carbon benefits of a carbon capture program.

 

“For any significant impact on climate change, you need to capture CO2 at the origin.”

 

There has been news about tankers being built carrying 12,000 to 20,000 of liquid CO2 to Iceland. “Perhaps that’s an omen of what may come.”

 

And while we can “paint quite bullish pictures” about the uptake of electric vehicle sales worldwide, “you need to put that in perspective of the [vehicle] fleet on a global scale.”

 

Asked where we are on the current market cycle, Kpler’s Matthew Wright said ““We should be through the worst, unless there's a sudden reversal or spike in COVID. If OPEC fall out again it might be great for tankers.”

 

“We're at the bottom, the only way is up. The supply signals and demand signals are positive.”

 



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