Crude tanker earnings across all size groups have been at very depressed levels in 2018.
Despite traditional support offered to the market during the winter months, spot TCE earnings on the key route from Hound Point to Wilhelmshaven (TD7) have averaged disastrous levels. The running average for the year to date shows a negative return of minus $1,750 per day for Aframxes with standard consumption levels before waiting time is taken into account.
In addition to weak fundamentals, there are also other factors behind this exceptional weakness that are unique to Aframaxes trading in Northwest Europe, Gibson said.
Mild weather for most of the winter season reduced volatility in rates to a minimum. There has also been a notable decline in Russian crude exports from the Baltic.
Crude exports from Primorsk and Ust-Luga averaged just under 1.3 mill barrels per day during the first quarter of this year, down by over 350,000 barrels per day, compared to the corresponding period in 2017. This followed the expansion of the ESPO pipeline spur into China mainland.
North Sea crude production has also declined, although not so dramatically. Output fell by 130,000 barrels per day during the first three months of this year relative to 1Q17.
While there is less demand, tonnage availability is greater, and the growing fleet is only one of the reasons. For example, since September, 2017, there has been a notable increase in volume of US crude being shipped to Europe, primarily on Aframaxes, boosting the number of tankers looking for employment in the region.
According to AIS data, during the first four months of this year, 35 Aframaxes loaded in the US for discharge in Northwest Europe, to just 14 units over the corresponding period of 2017.
Another 26 Aframaxes sailed from the US for the Mediterranean between January and April this year, versus 11 during the same period last year.
The current trade dynamics in North West Europe are unlikely to change dramatically in the near future, Gibson said. Production cutbacks need to be lifted to see any meaningful and sustainable increases in Russian crude exports
North Sea output is forecast to slip further this year and in 2019. Production is projected to bounce back in 2020, following the start-up of new projects in Norway. At the same time, crude supply in the US keeps rising at a relentless pace, suggesting that exports are also likely to carry on growing.
Most of the US crude growth demand is coming from Asia. However, until VLCC loading infrastructure in the US is improved to eliminate the expensive practice of reverse lightening, US barrels could remain attractively priced for the European market.
If this is the case, it will only keep Aframax availability off the UK/Continent and in the Mediterranean at elevated levels. Yet, as there is limited scope for growth in crude demand in Europe, growth is also likely to push more of the regional supply, be it West African, Mediterranean or North Sea barrels, to Asia on larger tonnage.
As far as the Aframaxes trading in the North Sea are concerned, perhaps the most realistic prospect for improvement in the immediate future is on the supply side. As spot earnings are worse than in other key trades, owners may be prompted to reposition to a different trading area, if the opportunity arises. In addition, owners of coated tankers may take an even more radical approach and switch to the clean tanker market completely.
However, longer term, the slowing pace of deliveries and prospects of higher demolition driven by new legislation offer hope for a more substantial recovery, Gibson concluded.