2021 crude oil tanker demolition stalls as second-hand prices win
The year 2021 has been tough on crude oil tanker freight rates across the board so far. Consequently, the industry buzz has been all about large scale scrapping of tankers, but so far, it has been all talk and very little walk, as the second-hand market has proved a much-preferred alternative.
The attractiveness of scrap steel prices around USD 450 per ltd. offered by breaker yard on the Indian sub-continent, easily vanish when compared to USD 24.5 million being paid for a 2002-built VLCC in the second-hand market.
For instance, in Q4 2014 through Q1 2016, tanker freight rates enjoyed high levels on the back of a sharp decline in oil prices during Q4 2014 to Q1 2015, but when tanker freight rates started to drop after Q1 2016, it took around five quarters for scrapping activity to pick up in July 2017.
Every crisis holds elements of something that we have seen before, in addition to elements that are new to us. The most striking recognisable element of the current crisis is that a lot of money was made before it all went sour, while the most striking new element seems to be the fact that demand is very different.
We currently observe two opposing future trends, both of which will steadily impact tanker trade lanes. Where non-OECD nations (mainly India, China and South East Asia) are rapidly heading towards a pre-pandemic level of oil demand, OECD nations on the other hand are on a very different track as the US is now joining Europe and Japan on a trend of a decline in the demand for oil.
2021 may not be about seasons at all; leaving the winter peak season behind us now, we can only look back at it as a non-event. The Asian refinery maintenance season is currently under way, but it will most likely become another regular element which will only be noticed to a small extent this year.
Tanker Market Edged Higher During December
The tanker market posted a mild rebound during the month of December. According to the latest monthly report from OPEC, dirty tanker rates experienced a slight improvement m-o-m in December, while still remaining near multiyear lows amid a persistent imbalance in tanker demand and availability. VLCC and Suezmax rates saw some improvement on eastward rates from the Middle East and West Africa, as well as from West Africa to the US Gulf Coast. Aframax rates edged lower, weighed down by a sluggish intra-Med performance. Clean tanker rates continued to see a pick up from multi-year lows seen at the start of the 4Q20, with gains both East and West of Suez. As with the oil market and the global economy as a whole, 2020 was a volatile one for the tanker market. However, in contrast to the oil market, March and April were ‘golden’ rather than ‘black’ months as tanker freight rates soared to record highs in all major shipping regions. Dislocations caused by the COVID-19 crisis resulted in an excess of crude in the market as consumption collapsed, overwhelming onshore inventories and leading to a surge in floating storage demand for both crude and products, all of which supported tanker rates across the globe. By June, spot freight rates had fallen back to lower levels, where they remained for the rest of 2020. While ongoing efforts to address the imbalance in the oil market by OPEC and participating non-OPEC countries in the DoC may reduce tonnage demand in the near term, the tanker market will benefit as the reduced overhang stabilizes oil trade trends, and as easing lockdown measures and a rollout of the COVID19 vaccine supports a return of economic activity.
Global spot fixtures declined m-o-m in December, after increasing the month before, falling 1.2 mb/d, or 7.2%, to average just under 15.1 mb/d. The decline occurred across all major routes. Spot fixtures were 3.2 mb/d, or more than 17%, lower than the same month last year, reflecting the overall muted environment due to the COVID-19 pandemic.
OPEC spot fixtures averaged 9.7 mb/d in December, representing a decline of almost 8% m-o-m, or 0.8 mb/d. Compared to the same month last year, OPEC spot fixtures were around 21% lower, or almost 2.7 mb/d, reflecting in part the production adjustments from OPEC countries. Fixtures from the Middle East-to-East averaged 5.7 mb/d in December, representing a decline of more than 0.7 mb/d, or around 11%, m-o-m. Y-o-y, this represents a decline of 1.0 mb/d or almost 16%. Middle East-to-West fixtures continued to lead the m-o-m losses, falling 13%, or 0.1 mb/d, in December to average 0.8 mb/d. This was still 0.7 mb/d, or 47%, lower compared with the same month last year. Outside of the Middle East, fixtures were broadly flat, down less than 1% m-o-m, to average just under 3.3 mb/d. Y-o-y, fixtures declined more than 22% or just under 1.0 mb/d
Sailings and arrivals
OPEC sailings increased 1.4% in December, or 0.29 mb/d, to average 20.76 mb/d, compared with a yearhigh of 25.5 mb/d in April. The increase came as more Libyan barrels became available in the market. Y-o-y, OPEC sailings were 4.1 mb/d, or 16%, lower. Middle East sailings averaged 14.4 mb/d, representing a decline of around 0.3 mb/d m-o-m, or almost 2%. This was down almost 3.1 mb/d, or 18%, compared to the same month last year.
Crude arrivals declined m-o-m in December across all regions except West Asia. Arrivals in Europe led the losses, averaging 10.0 mb/d, representing a drop of almost 3%, or 0.3 mb/d, over the previous month, but were still 1.7 mb/d, or close to 15%, lower y-o-y. Far East arrivals declined by close to 3% m-o-m, or 0.3 mb/d, to average 10.8 mb/d, although this represented a y-o-y increase of 28% or 2.4 mb/d. North American arrivals also fell around 3% m-o-m, or 0.2 mb/d to average 7.4 mb/d. They also saw the largest y-o-y loss of 19% or 1.7 mb/d. In contrast, arrivals in West Asia provided a bright spot, increasing 13% m-o-m, or 0.7 mb/d, to average 6.1 mb/d.
Dirty tanker freight rates
Very large crude carriers (VLCCs)
VLCC spot rates saw some improvement in December picking up from very low levels, supported by gains across all major routes. Spot freight rates rose 24% m-o-m, but still remained 68% lower compared to the same month the year before. Rates on the Middle East-to-East route rose 34% m-o-m in December to average WS35 points. Y-o-y, rates were 69% lower compared with the same month in 2019. Rates on the Middle East-to-West route increased 19% m-o-m to average WS20 points. Y-o-y, rates were down 68%. The West Africa-to-East route experienced a similar increase, up 19% m-o-m to average WS36 points. Rates were 67% lower compared with December 2019.
Suezmax rates experienced mixed movement in December, resulting in average spot freight rates edging up 2% m-o-m on average, the second-consecutive monthly increase. However, they were still 74% lower y-o-y. On the West Africa-to-US Gulf Coast (USGC) route, Suezmax rates averaged WS34 points in December, representing a 6% gain from the month before. Y-o-y, rates were 76% lower than in December last year. The Northwest Europe (NWE)-to-USGC route declined 3% m-o-m to average WS30 points, representing a 71% decline from the same month last year.
Aframax rates were broadly stable in December, edging lower by just 1% m-o-m. Compared to the previous year, however, rates were 71% lower. The Caribbean-to-US East Coast (USEC) route were unchanged m-o-m in December, with rates averaging WS69. Y-o-y, rates on the route were 72% lower.
Developments in the Mediterranean routes continued to diverge slightly. The Cross-Med route declined in December after increasing the previous two months, falling 2% m-o-m to average WS60. In contrast, the Mediterranean-to-NWE route was broadly unchanged averaging WS53, which represented a 71% drop y-o-y. Meanwhile, the Indonesia-to-East route declined 3% to average WS51, which was some 72% lower y-o-y.
Tanker Market Starts the Year on a Positive Note
Τhe tanker market has entered 2021 with renewed optimism thus far, despite estimates of the opposite. Τhere was hope in the air for the first full trading week of the New Year, with added volumes from OPEC+ and the perception that we were behind the curve on the fixture count. Alas, OPEC did a U-turn and as proceeding got going it transpired that much more had been done quietly under the radar than first thought. Like one politician ones uttered “It feels a bit like someone stole our clothes while we were enjoying a swim”. With that, rates have taken a hit in all areas and a continued downward bias is evident. Please note that new 2021 Worldscale flat rates are down 16-17% on average, thus rates are not directly comparable to last years.
Various vaccines have been successfully developed and given the green light which should see this year’s Covid-19 variant brought under partial control, or at least in the countries that can afford to buy it. The downside is that a general malaise in the Suezmax market is going to persist until demand picks up towards the end of the year. It should be noted that attempted terrorist acts in the Red Sea and MEG have had zero affect on rates, which suggests owners will adopt a reactive approach, therefore only attaching a premium to these runs if the unthinkable happens. All Suezmax markets will trade flat/soft for the remainder of the week, with Western markets looking particularly vulnerable to further falls.
Rally in product tanker stocks to be short-lived
Product tanker stocks have climbed in the last month (23 October to 25 November) mainly driven by a rally in the global equity markets and seasonal strengthening of product tanker freight rates. DMFR product tanker index rose 16.9% since 30 October, while S&P 500 increased 11% and Baltic clean tanker index grew 19.2% in the same period. After record high earnings in 2Q20, company earnings dipped in 3Q20 as spot shipping rates declined. We delve deeper to find whether fundamentals support the recent rally in product tanker stocks.
Earnings coming off from the peak in 2Q20
Results of product tanker companies benefited from higher TCE in 3Q20 compared to 3Q19. However, their net income in 3Q20 was lower compared to 2Q20 with declining freight rates. Product tanker freight rates fell in 3Q20 mainly because the tankers that were earlier employed for floating storage are returning to active trade at a time when their demand has weakened. Product tanker trading fleet has grown at 4.3% between end-2019 and October 2020, which is resulting in oversupply. We believe TCE rates for product tankers companies were closer to their cash flow breakeven in 3Q20. We expect cash flow breakeven to range between USD 13,500pd and USD 16,500pd.
Fixed chartering strategy pays off
In 3Q20, D’Amico recorded the highest operating margin among the major product tanker companies due to its strategy of deploying the majority of its vessels on long-term charter. D’Amico had 63.5% of its total employment days in 9M20 covered through time charter at an average daily rate of USD16,041pd. In comparison, other product tanker companies (Ardmore, Scorpio Tankers and Hafnia) had the majority of their vessels employed in the spot market. Shipowners with larger product tanker vessels such as LR2 and LR1 benefited from the demand of these vessels for floating storage.
Product tanker stocks surge in line with global equities
After lacklustre returns for the majority of the year, DMFR product tanker index has surged 16.9% in November (as of 26 November 2020). Ardmore is the best performing stock, having gone up 17.1% during this period. While we believe the rally in product tanker stocks is in line with global equity markets, part of the rally is attributed to the seasonal strength in product tanker rates. Global equity markets have rallied on the hopes that the COVID-19 vaccine will soon be available as well as the potential stimulus with the new government taking charge in the US. The Baltic clean tanker index (BCTI) has gone up 19.2% from the lows of October because of seasonal demand, but product tanker rates are still lower for 4Q, which is considered a strong quarter for these vessels.
Product tanker prospects remain weak
Despite the recent strength in the product tanker market, we expect it to weaken in 2021 due to low demand for oil products. We project the rates for these tankers to dip in 2021 on average as in 2020 rates benefited from the cushion of supply inefficiencies. The ongoing lockdown in the UK and other parts of Europe will hamper product tanker demand in the rest of 2020 and in 1H21. Moreover, oil products demand is unlikely to return to 2019 levels before 2022. In such a situation, the medium-term outlook is also bearish for the product tanker market.
Rally in product tanker stocks to be short-lived
Given our expectations of a weaker product tanker market in 2021 and bearish medium-term outlook, we believe the ongoing rally in product tanker stocks is unlikely to last. In 1H20, product tanker owners saw a massive jump in profits, but we project earnings to be lower in 4Q20 and in 2021.
Floating Storage: A Ticking Time Bomb For The Crude Tanker Market
There is no denying that a sudden plunge in oil demand on account of COVID-19 proved to be a blessing in disguise for the oversupplied crude tanker market in 2Q20, which led to a surge in onshore and offshore storage of crude in March-April. While an increase in onshore storage of cheap oil by refineries boosted tonnage demand, a rise in floating storage of crude oil squeezed tonnage supply in the crude tanker market. Consequently, freight rates in the crude tanker market climbed to record highs in March-April 2020, when oil demand was at multi-year lows.
However, with the gradual recovery in oil demand, many vessels locked-in floating storage have started to return to trade, hurting freight rates. Although freight rates, both in the period as well as spot markets, have come down significantly from the highs in April, they are still not truly reflective of the weak demand-supply fundamentals. The 1-year TC rate for VLCCs has declined from an average $60,000pd in April to $35,000pd in August. Nonetheless, about 7% of the crude tanker fleet, including 64 VLCCs, was still locked in floating storage at the end of August with the majority of these vessels storing oil offshore China.
Yet another round of floating storage surge in the offing?
An increase in short-term period chartering of VLCCs in the first half of September has increased market speculation about another surge in floating storage of crude oil. As charter rates have declined, any possible deepening in the crude price contango would provide a profitable floating storage opportunity to charterers. Moreover, as many short-term time-charter deals done in March-April for floating storage at high rates are now expiring, recent charter deals would possibly be a mere replacement charter. Nonetheless, considering the weak prospects for oil demand, we do not expect any significant deepening in the contango and a rise in floating storage.
When will the floating storage bubble bust?
Floating storage has artificially squeezed tonnage supply in the crude tanker market, supporting freight rates. However, floating storage is a ticking time bomb for the crude tanker market since sooner or later, these vessels will return to trade crude, and the resultant influx of tonnage in the market will eventually hurt freight rates. The timing of the return of these vessels to crude oil trade will thus decide the fate of the crude tanker market.
As the prospects for oil demand over the next couple of years are not bright, the chance of any significant surge in oil prices is limited. In such a scenario, the upcoming winter season will provide the best exit opportunity for traders to offload oil stored on vessels, as demand will climb higher during this period. The influx of tonnage from floating storage in such a case will thus negate any significant recovery in freight rates this winter, and thus VLCC earnings in 4Q20 would remain significantly lower than what FFAs suggest.
Tankers: Little Movement on the Rates
A quiet week in the Middle East resulted in little movement on the rates. 280,000mt Middle East Gulf to USG via the Cape/Cape routing still being assessed at the WS21 level and 270,000mt to China slipped a couple of points to W33/34 region.
In the Atlantic, 260,000mt West Africa to China nudged down similarly to WS37.5, while a more active USG export market saw four ships reported on subjects at levels between $5.35m and $5.3875m for the 270,000mt US Gulf to China trip, which is now assessed at $5.38-5.39m level. That’s modestly up about $60k from last week.
Rates for 135,000mt Black Sea/Med managed to climb 7.5 points to WS62.5-63 region while 130,000mt West Africa/UKContinent gained a meagre 2 points to WS49-50 level. The 140,000mt Middle East Gulf to Med trade remained static at around WS23.
In the Mediterranean market, owners came under pressure again and rates have eased about a point to WS57.5 for 80,000mt Ceyhan/Med. In Northern Europe, rates for 80,000mt Cross-North Sea increased three points to about WS82.5, while 100,000mt Baltic/UKCont saw a similarly positive effect to close to WS57.5. Across the Atlantic rates have marginally increased with the 70,000mt Carib/USGulf trade now at WS78, up a couple of points. 70,000mt USGulf/UKCont voyages are five points higher than a week ago at WS80.
In the Middle East Gulf, rates for 75,000mt to Japan have been under pressure. After starting the week in the high WS50S, Clearlake were able to finally set the tone and fix BW tonnage at WS55. In the 55,000mt trade, rates were steady at WS60 level. It was a disappointing week for owners plying the 37,000mt UKC to USAC trade with the market easing from WS102.5 a week ago to WS95. This is last seen fixed here but brokers feel there is potential for further softening – and the market now is assessed in the low WS90s. In the backhaul business from the US Gulf, charterers have generally held the upper hand and have been able to chip away at rates which have eased now from WS102.5 level a week ago to sit at close to WS 92.5. It was another uninspiring week for owners in the 30,000mt clean cross-Med trade with rates only able to nudge up at best five points to WS85 and there is still plenty of early tonnage available.
Oil product tanker S&P activity down 45% as new reality unfolds
Oil product tankers earnings have skyrocketed in the first half of 2020, while the Sale and Purchase (S&P) activity of the oil product tanker market has slowed to the lowest level since 2016. Data from VesselsValue highlight that in the first five months of 2020, only 2.8m DWT of oil product tankers have shifted hands in the second-hand market, a 45% drop compared to the same period last year.
A surprising S&P slowdown?
The oil product tanker market has thereby experienced a disconnect in the first half of 2020 with high spot earnings, while S&P activity has remained subdued.
However, S&P activity, as well as the 1-year time charter rate, often serve as better indicators for the strength of the underlying oil product tanker market. Although the oil product tanker S&P activity picked up slightly in May to 0.49m DWT from 0.33 in April, it is hardly a change in trend.
The low appetite for second-hand oil product tankers, despite spiking spot earnings, partly indicate that the medium-term outlook remains clouded by uncertainty. This is also indicated by the 1-year time MR charter rates that have started to feel the heat in June with substantial declines in a matter of weeks.
Plunging oil demand gives dire outlook
The jury is still out as to which shape the recovery of the global economy will take. The International Monetary Fund (IMF) has recently placed their bets on a swoosh-shaped recovery with real global GDP forecast to decline by 4.9% in 2020 but grow 5.4% in 2021. BIMCO similarly expects the global economy to recover at a slow and gradual pace.
No matter the recovery shape of the global economy, annual oil demand is set to plunge in 2020. In June 2020, the International Energy Agency (IEA) forecast that oil demand for the full year of 2020 would decline by 8.1 million barrels per day. The worst drop in oil demand was seen in Q2, but demand will continue to be impaired in the coming months and negatively impact the prospects for oil product tankers in the second half of 2020.
Evidently, this bleak outlook has manifested itself in the S&P market. The low S&P activity in the first five months of 2020 stand in massive contrast to the two preceding years, where the S&P market was substantially more liquid. VesselsValue data highlights that S&P activity remained high through 2018 and 2019, with a total sales amounting to respectively 12.2m and 13.5m DWT, as the IMO 2020 Sulphur Cap deadline approached.
2 out of 3 transactions had a European seller
Data by top 10 nations of buyers underscore that especially Asian and European buyers have shown greater appetite for oil product tankers. Chinese buyers accounted for 22.3% amongst the 10 largest buyers, while Greece and Denmark respectively accounted for 23.6% and 12.3%. Other large oil product tanker buyer nations in 2019 included Singapore, Indonesia, and United Arab Emirates.
The fragmented nature on the buyer side is not mirrored on the seller side, where Europe stands out as the dominating region, accounting for a whopping 67% of total sales by top 10 seller countries in 2019. As on the buyer side, Greece and Denmark stand out as the largest nations with respectively 28.1% and 19.8% shares of the top 10 seller countries. Singapore and Japan were the largest Asian seller nations in 2019 with 13.6% and 10.6% shares of total sales by the top 10 seller nations.
Oil product tanker asset prices down by 15.7%
Asset prices for oil product tankers have gradually recovered since 2017. As was the case with S&P activity, asset prices started to notably gain steam in the build-up to the 2020 IMO sulphur regulation coming into effect. This development is particularly evident with asset prices for medium-range (MR) oil product tankers, the workhorse of the segment, which peaked in the fall of 2019. At that time, a 5-year old MR2, defined as 41-55k DWT, had appreciated to just above 30 million USD, a large improvement from the 2016 low of around 23 million USD.
However, prices have started to dip in 2020 with the second-hand price for a 5-year old MR down by 15.7% year-to-date as of June 30 2020. Given the current oil demand forecasts which suggests a gradual recovery, it is likely that asset prices will continue to lose steam in the coming months.
However, asset prices are likely to settle at a price floor at some point, as the asset-play investors eye opportunities and enter the market. The asset-play strategy is essentially a game of patience and timing, where investors patiently wait for asset prices to depreciate and then strike when prices are perceived to be sufficiently low. The Global Financial Crisis in 2008 briefly plunged most of the shipping markets into the abyss, and in many cases cut asset prices in half, which allowed well-capitalised investors to strike.
The context of the economic crisis in 2020 differs greatly from that of 2008, but asset prices are similarly poised to depreciate significantly. In turn, the sharp depreciation of oil product tanker asset prices in 2020 will likely pave the way for a pick-up in S&P activity later in the year.
Tanker Market: April Was A Stellar Month
April was a stellar month for the tanker market, with both dirty and clean rates continuing to see spikes during the month, OPEC said in its latest monthly report. The volatile trend that began in early March continued into April, with dirty freight rates peaking early in the month and then trending lower, although remaining at relatively high levels. Rates were supported by a surge in tanker demand that continued through April, driven by low crude prices and a need to push out excess supplies amid concerns about the availability of onshore storage capacity. Meanwhile, clean tanker rates jumped to historic highs in the middle of April, as a collapse in demand due to COVID-19 lockdowns, storage constraints and a strong contango structure for key products gave refiners and traders an incentive to boost product exports and to turn to floating storage. However, these market trends were quickly overwhelmed, sending rates down to more typical levels by the end of the month. The implementation of the historic OPEC+ decision in May along with sharp reductions in capex and drilling activities in the US are expected to weigh on tanker demand in the coming months, although increased floating storage will provide offsetting support.
Global spot fixtures fell m-o-m in April, declining by 0.8 mb/d, or 4%, from the high levels seen in the previous month to average 19.1 mb/d. Spot fixtures were broadly in line with the performance seen in the same month last year. Fixtures remained at high levels supported by crude bookings from major exporters, which picked up from the previous month.
OPEC spot fixtures averaged 13.79 mb/d in April, broadly in line the previous month, but an increase of 0.6 mb/d or 5% y-o-y. Fixtures from the Middle East-to-East were also stable m-o-m in April at 7.9 mb/d. Y-o-y, fixtures on the route were 1.1 mb/d, or 16%, higher. Middle East-to-West fixtures declined 14% m-o-m in April coming off the substantial gain seen in the previous month. Fixtures on the route averaged 2.5 mb/d, representing an increase of 0.7 mb/d, or 41%, over the same month last year. Outside of the Middle East, fixtures recovered from the previous month’s decline, rising 0.5 mb/d or 17% m-o-m to average 3.4 mb/d in April. In annual terms, fixtures were sharply lower, registering a decline of 1.2 mb/d or 26%.
Sailings and arrivals
OPEC sailings jumped 1.9 mb/d in April to average 25.74 mb/d and increased1.1 mb/d, or 5%, compared to April 2019. Middle East sailings rose 0.6 mb/d, or 3%, m-om to average 17.75 mb/d for a y-o-y gain of 0.6 mb/d or 4%. Crude arrivals were higher in April on all routes outside the Far East. Arrivals in West Asia saw the highest gains, increasing 6% m-o-m, although remaining broadly at the level seen in April last year. Arrivals in North America rose 1% m-o-m to average 7.9 mb/d. Y-o-y, arrivals were still 26% lower on the route. Arrivals in Europe were broadly consistent m-o-m in April averaging 11.0 mb/d In contrast, Far East arrivals declined 9% m-o-m to average 8.0 mb/d in April, but were broadly in line with the level achieved in the same month last year.
Dirty tanker freight rates
Very large crude carriers (VLCCs)
The positive momentum that began in March continued on into April with an increase in cargoes and demand for floating storage supporting rates. As a result, VLCC spot freight rates saw further gains across the board during the month, with rates rising by 16% on average m-o-m. Rates on the Middle East-to-East route led gains in April, up 23% m-o-m to average WS156 and were up three-fold compared to the same month last year. Freight rates for tankers operating on the Middle East-to-West route rose 2% m-o-m in April, on top of the substantial jump seen the month before, to average WS103. Y-o-y, rates were almost five-times as high. Increased activity also tightened the West Africa-to-East route, where rates rose 20% to WS145, representing a gain of more than 200% compared with April 2019.
Suezmax rates also benefited from the higher activity, with average spot freight rates increasing 16% m-o-m on average in April. Y-o-y, rates were up 118%. Rates for tankers operating on the West Africa-to-US Gulf Coast (USGC) route averaged WS140 in April, an increase of 14% over the month before. Y-o-y, rates were 133% higher than in April last year. The Northwest Europe (NWE)-to-USGC route rose 4% m-o-m to average WS102, representing a 100% jump compared to the same month last year.
Aframax rates rose 8% in April, mirroring gains in other classes to a lesser extent. Compared to the same month last year, rates were 85% higher.The Indonesia-to-East route led Aframax gains, increasing 28% to average WS154. The Cross-Med route rose 10% to average WS149, while the Mediterranean-to-NWE route gained 7% to average WS156.
Only the Caribbean to US East Coast (USEC) route experienced a decline m-o-m, dropping 7% to average WS153, but still managed a strong y-o-y increase of 95% to average WS153.
Crude oil tanker earnings drop 68% in nine days
Crude oil tanker earnings have come down sharply in recent weeks with Very Large Crude Carrier (VLCC) earnings from the Middle East Gulf to China dropping 68% in just nine days (from USD 222,591 per day on 22 April to USD 71,885 per day on 4 May). In the same period, daily VLCC earnings from the Middle East Gulf to the US Gulf have plunged nearly 80% (from USD 162,433 per day to USD 36,249).
The window of extraordinary earnings closed at the end of April with the OPEC+ oil production cuts of 9.7 m/bpd on 1 May, reducing the flood of oil in the market. The tanker market is now challenged by a collapse in oil demand as a result of the coronavirus outbreak.
The oil supply and demand shocks of 2020
The oil tanker market has enjoyed a paradise of profitability, but very much on borrowed time since the outbreak of the oil price war. As the oil supply shock abates, the effect of the unprecedented oil demand shock, estimated to be a drop of 23.1 m/bpd in the second quarter, will set in.
Perhaps, second only to a coronavirus vaccine, oil storage has been the most sought-after item in recent months. This has been reflected in the skyrocketing crude oil tanker time-charter rates brought about by oil suppliers and traders seeking to charter ships for floating storage.
The uptick in floating storage in 2020, temporarily removing capacity from the market, is not expected to provide a silver lining that can offset the faltering demand and overcapacity. One can only hope that the strong earnings have fortified the cash reserves of oil tanker companies for the treacherous months that lie ahead.
Americas Tanker Freight climbs on Depressed Crude Price Dynamics
Rising demand for floating storage boosted freight rates for tankers carrying crude out of the Americas on Tuesday as prices for prompt US light sweet barrels were pressured by onshore storage constraints and a runaway supply overhang.
Charterers were left at the mercy of shipowners for storage opportunities as the crude contango structure steepened and as the Persian Gulf saw an influx of cargo inquiries with Tuesday’s announcement of Saudi Arabian crude cargo stem nominations for May, sources said.
“With TD3C (270,000 mt Persian Gulf-China route) where it is, owners can do whatever they like,” a shipbroker said. “Throw in the storage bankruptcy and it’s all very good if you are a tanker owner for now.”
The cost of taking a VLCC on a US Gulf Coast-China voyage was assessed at lump sum $17 million Tuesday, on a 270,000 mt basis, up $1.7 million, or 11%, day on day, and 13.3% week on week.
The NYMEX WTI May futures recovered to expire at $10.01/b at the Houston close Tuesday, after falling to negative $37.63/b Monday, an all-time low for the prompt-month contract amid fears of May barrels filling tanks to the brim in Cushing, Oklahoma.
In recent weeks, crude sources have noted a continued slump in spot physical cargo trading activity, citing global supply and demand shocks brought on by the global spread of the coronavirus pandemic and the ensuing dispute over production cuts between Russia and Saudi Arabia. The sparring was resolved through an agreement to output cuts of 9.7 million b/d, but lasting impacts from the resulting supply overhang have continued to take a toll on the petroleum complex. Still, crude supplies continue to be higher as producers rush to shut-in wells and lingering barrels from the output dispute make their way to the USGC.
Meanwhile, pressure on values of crude along the USGC grows as more Saudi Arabian crude carriers appear to be on the way, adding to the pileup of Middle Eastern crude without a buyer in the Gulf of Mexico.
Currently some 12 laden VLCCs heading to the USGC and expected to arrive between April 24-May 21 after loading at Ras Tanura, according to S&P Global Platts analytics and cFlow. It is unclear if all 12 tankers will be able to unload upon arrival due to storage constraints. Three Saudi Arabian-flagged VLCCs were observed on the USGC Tuesday morning, believed to be laden.
FLOATING STORAGE PAYOFF
In the spot physical cargo market, West Texas Intermediate crude offered along the USGC was assessed at a $5.26/b, or $38.92/mt discount to the 15- to 45-day forward Dated Brent strip, having risen $3.75/b from an all-time low Monday in tandem with the NYMEX May WTI weakness.
Floating storage costs are more than paid-off, with the NYMEX WTI May carry between the May and October contracts settled at $15.55/b, or $115.07/mt, Tuesday.
A typical storage play is booked on larger tonnage VLCCs, with a six-month minimum time charter agreement booked at $86,000/day last week, however, sources talked of possible next done levels on storage deals in a range of $110,000/day to $140,000/day Tuesday, or $73.33/mt-$93.33/mt, and for 180 days above the $200,000/day level, or $22.22/mt, for shorter 30-day charters, with the USGC region possibly demanding higher earnings.
“A [VLCC] open in the USGC can make around [$200,000/day] for 70+ days on a spot charter so why bother with a potentially short period and less money,” a shipowner said.
CHARTER INTEREST IN MID-SIZE TANKERS
Charterer interest has shifted into mid-size tankers for storage as rates have become marginally more favorable, along with convenient positioning and availability in specific regions like the Mediterranean and West Africa. Additionally, Suezmaxes tend to have heating coils unlike their larger VLCC counterparts, making them even more favorable to charterers, sources said.
“There has been an uptick in storage inquiries, more people asking questions,” a Suezmax shipowner said Tuesday. “No one seems to be committing just yet.”
Six-month floating storage contracts were last done at $55,000/day or $76.15/mt per 180 days, with owner indications moving to the $57,500/day to $65,000/day or $79.62/mt to $90.00/mt for 180 days range to start the week, all basis 130,000 mt stored. Charterers have been heard bidding Aframaxes for 30-180 day storage plays at $45,000/day or at $90/mt for 180 days basis 90,000 mt stored.
Condition Survey Requirement For Tankers Carrying Heavy Fuel Oil (HFO) As Cargo
As part of a concerted industry effort to ensure higher ship standards, the International Group of P&I Clubs continues to implement survey triggers for seagoing vessels of 10 years of age or more carrying HFO.
As a consequence, all sea-going vessels aged 10 years or more which have carried heavy HFO as cargo within the previous 12 months will be subject to condition survey, unless:
- the vessel has undergone a P&I club condition survey during the previous 12 months; or
- the vessel has undergone a Special Survey during the previous 6 months; or
- the vessel has a valid Condition Assessment Program (CAP) rating of 1 or 2 with a classification society having membership in the International Association of Classification Societies (IACS).
HFO is defined as residual fuel with a kinematic viscosity of 380 centipoises when measured at 50 degrees Celsius by the ISO 3104 test method. This excludes vessels carrying intermediate fuel oils or heavy crudes, as well as those carrying bitumen or tar.
Members should note that a declaration is now required so that the Club may determine whether HFO has in fact been carried by an insured vessel as cargo during a relevant policy period. Therefore, the first declaration must be made this year as soon as possible, but not later than April 30, 2020 for vessels carrying HFO between February 20, 2019 and February 20, 2020.
If a vessel continues to carry HFO as cargo over a period of successive years, the Club is not obliged to carry out a survey every year. However, a survey will need to be held at least every three years after the first survey has taken place. It is at the Club’s discretion whether or not to undertake surveys on a more frequent basis.
As always, the Managers will be pleased to respond to all enquiries arising from the above.
IMO 2020: What’s The Implication in the Tanker Market So Far?
In the weeks leading up to 2020, a lot of analysts were predicting a solid rebound in product tanker market freight rates, a scenario which, for the most part, was materialized. So, how has the market reacted in the weeks after the start of 2020? In its latest weekly report, shipbroker Gibson said that “2020 was always going to create a more complex fuel oil market as trade flows shifted and new grades emerged. The first and most obvious impact was a collapse in the volumes of high sulphur fuel oil (HSFO) flowing from West to East – a trend which emerged from the second quarter of 2019. Trade in low sulphur fuel oil (LSFO) then gradually began to rise from Q2 2019 as traders/suppliers sought to gradually build stocks ahead of 2020. However, total volumes (irrespective of sulphur content) have not recovered to the levels seen in 2018, with lower arbitrage flows impacting on long haul tanker movements. In 2018, 1.17 million b/d of fuel oil was shipped from West to East. In 2019, this dropped to average 760,000 b/d, (down by 410,000 b/d YOY). So, where has this fuel gone if it hasn’t headed East, and how are fuel oil flows expected to evolve in the future?”
According to Gibson, “the US increased imports of HSFO and vacuum gasoil (VGO) towards the end of 2019 and is expected to remain an outlet for these grades for the foreseeable future, providing pricing is favorable. Seasonal fluctuations will of course play a role. Eastbound HSFO trade is expected to pick up in the summer when Middle East energy demand peaks. Given OPEC+ cuts, Saudi Arabia and other Middle East producers will likely burn more fuel oil in order to minimize crude direct burn (which has declined in recent years anyway)”.
The shipbroker added that “China had been expected to add to VLSFO supplies, having introduced a tax rebate in January. However, given the coronavirus outbreak, higher Chinese supplies might take time to emerge, supporting Asian import demand. Although, this may be countered by lower bunkering demand if global trade is particularly hard hit. The startup of two 35,000 b/d very low sulphur fuel oil (VLSFO) producing units in the first half of 2020, (one in Malaysia and one in Korea) will add to regional VLSFO supply later in this year, which when combined with expected higher output from China, may limit the need to increase LSFO imports into Asia. The eventual startup of Aramco’s Jazan refinery is also expected to add to Middle East fuel oil availability, potentially reducing Saudi Arabia’s import requirements”.
Gibson added that “it is also unclear at this stage how much HSFO has been eradicated from the system through refinery upgrades or changing crude slates. Given that large scale floating storage has not yet emerged, it appears the global system has been able to absorb much of the surplus. Looking at inventories in the major bunkering hubs, except for Fujairah, fuel oil/residue stocks (irrespective of sulphur content) are within historical ranges. Demand for marine gasoil (MGO) as a bunker fuel (at the expense of VLSFO) remains uncertain. Initially, MGO was expected to be the preferred bunker fuel of choice until VLSFO supply and quality concerns were overcome. However, VLSFO stole an early march on MGO. Now, reports are emerging from Northern Europe that bunker sales have been shifting in favour of MGO in recent weeks. The expectation remains that VLSFO will become the dominant fuel, although only time will tell. The markets will continue to adjust over the coming months, after which it will become clearer which trends are long term vs. short term adjustments”.
The shipbroker concluded that “another testing week for unbalanced VLCCs to endure.Rates remained stuck in the very low ws 40’s East and theoretically mid ws 20’s West via Cape but scrubber fitted units were willing into the mid ws 30’s East, which would translate into loss making returns for non-fitted units. With Chinese demand waivering and availability still weighty, Owners truly have nowhere to go…delays and disruptions developing in the Far Eastern hubs are the only realistic hope. Suezmaxes drifted sideways, and then downwards upon insipid demand and easy supply. 130,000mt by ws 75 East and to ws 35 West now, with little expectation of any near term snap back. Aframaxes wrestled free from their muddy 80,000mt by ws 100 AGulf/Singapore bottom but so far by only a few ws points, the groundwork has now been done for something a bit better next week though”, Gibson said.
Fujairah oil stocks fall 6 percent on week
Oil product stocks at Fujairah in the UAE fell 6 percent week on week to 22.804 million barrels on 10th February, with inventories of all products falling except light distillates, which hit a 6-month high, data released by the Fujairah Oil Industry Zone, FOIZ, showed.
Stocks of heavy distillates and residues, including fuel oils used for marine fuel and power generation, fell 7.6 per cent in the week to 11.88 million barrels, the data showed.
Middle distillates inventories, which include jet fuel, marine bunker gasoil, kerosene and diesel, plunged 27.3 per cent over the same period to 2.949 million barrels, the lowest since 28th September last year.
However, inventories of gasoline and other light distillates bucked the downtrend, rising 8.8 per cent on the week to 7.975 million barrels, the highest since 19th August last year, according to the FOIZ data compiled by S&P Global Platts. Platts holds exclusive rights to publish Fujairah oil inventory data, and has deployed a blockchain network for its collation.
FOIZ was established to develop the petroleum strategy for investment in the region. According to FOIZ, 11 terminals are participating in the weekly stock reporting, including storage volumes involved in activities such as blending and refining.
Stranded tankers, full storage tanks: coronavirus leads to crude glut in China
The coronavirus’s effect on energy markets is worsening, as the sharp fall in demand in China, the world’s largest importer of crude, is stranding oil cargoes off the country’s coast and prompting shippers to seek out other Asian destinations.
More than 1,360 people have died from the coronavirus in China, which has disrupted the world’s second largest economy and shaken energy markets, with international benchmark Brent crude oil down 15% since the beginning of the year.
Major international energy forecasters expect demand to fall in this quarter, the first drop in a decade, due to the outbreak.
Chinese refineries have cut output by about 1.5 million barrels per day (bpd) over just two weeks, causing crude stocks to pile up.
That has left numerous Very Large Crude Carriers (VLCCs), capable of holding more than 2 million barrels of crude each, unable to unload at China’s top crude import terminal of Qingdao, Refinitiv data shows.
Other cargoes are being diverted to South Korea, Malaysia, Singapore and other locales in China, while storage tanks in Shandong province – where Qingdao is located – are filling swiftly, sources said.
Oil storage tanks in China’s eastern Shandong province are nearing peaks seen last June as independent refiners slash processing rates, industry sources said.
“We are cutting runs, but we still have (crude) cargoes on the way,” said a Chinese refinery source, adding that the company was still exploring options as land storage is limited and it is costly to store on ships.
Shandong’s commercial and strategic crude oil stocks are currently at 171.5 million barrels, not far from their peak of 175 million barrels in early June last year, according to oil analytics firm Kpler.
“In theory, there is a lot of spare capacity to fill, but we have never seen this full utilization” of storage, said Kpler analyst Alexander Booth, adding that utilization rates are currently at 61% in Shandong, versus 63% at last year’s peak.
China’s overall crude storage is at 760 million barrels, versus a peak of 780 million barrels in early June last year, Kpler’s data shows.
DEMURRAGE COSTS RISE, FREIGHT RATES PLUNGE
The lack of space in tanks is prompting traders to divert cargoes scheduled to arrive in February and March until China’s demand improves, multiple trade and shipping sources said.
When vessels cannot be unloaded, their charterers have to pay what is known as demurrage costs. Those fees have climbed to more than $100,000 per day for a cargo arriving next week compared with about $90,000 per day for those loaded 40 days ago, prompting some shippers to try to transfer crude to older tankers that cost less to operate, they said.
Freight rates meanwhile, have plunged to nearly half the levels they were at as the virus has hit demand and after the U.S. partially lifted sanctions on one unit of Chinese shipping firm COSCO.
Sources at Shandong ports said while storage levels are high, they are working with refineries to move oil out and make way for more cargoes that are expected to arrive in the coming weeks.
“The pace of moving crude out from tanks is slow. So if vessels are arriving at the same time, some of them might need to wait for 2-3 days,” said a source at Rizhao port in Shandong.
“We still have around 30% of space at our oil storage at this moment, which is already a lot better than the previous weeks, as truck drivers are gradually returning to work.”
Manufacturing activity was paused for the Lunar New Year last month when the virus struck, preventing workers from returning to their jobs.
State-run ChemChina has diverted some crude oil cargoes which were supposed to arrive in China to floating storage near Malaysia, a source with direct knowledge of the matter told Reuters. ChemChina did not respond to an email seeking comment.
Oil traders have signed new crude oil storage leases in South Korea, the nearest storage option to Qingdao, this week, said a source familiar with the matter.
Two supertankers – Universal Winner and Aegean Dream – carrying Brazilian crude originally heading for China have been diverted to the Singapore straits, Refinitiv data showed.
Tanker Market on Rollercoaster Mode
The tanker market has had quite a ride during the first month of 2020. According to the latest monthly report from OPEC, issued this week, dirty tanker spot freight rates in January continued the roller coast movement seen since September, this time giving back almost half the gains made in the previous month. However, rates remained some 50% higher than the same month last year, as the market remained optimistic about an improvement in rates in 2020. Seasonal factors were a key contributor to the decline. The outbreak and rapid spread of the Coronavirus temporarily upended the tanker market starting at the end of January, disrupting trade with China, the world’s largest crude importer, and is certain to weigh on rates in February. After rising steadily since September 2019, clean tanker rates fell back in January, but remained slightly higher than the same month last year. Rates benefited from a strong start to the year, but have fallen in recent weeks, driven by seasonal factors.
Global spot fixtures edged down slightly in January, declining around 0.10 mb/d or 0.5% m-o-m, but down 1.6 mb/d, or 8%, compared to the previous year’s levels.
OPEC spot fixtures averaged 12.58 mb/d in January, up 1.4% or 180 tb/d higher than the previous month, but still almost 9% or 1.2 mb/d lower y-o-y. Fixtures from the Middle East-to-East jumped by almost 15%, or 1 mb/d, to average 7.71 mb/d in January, but fell 3% below last year’s level. Middle East-to-West fixtures were sharply lower, down nearly 30% to 1.1 mb/d. Compared to the same month last year, rates on the route fell by over 18% or 260 tb/d. Outside of the Middle East fixtures averaged 3.75 mb/d in January, a decline of 0.5 mb/d, or over 11%, from the previous month, and were down 16%, or 0.7 mb/d, compared to the same month last year.
Sailings and arrivals
OPEC sailings declined by less than 1% m-o-m in January to average 24.93 mb/d. Sailings from the Middle East were 2%, or 120 tb/d, higher to average 18.36 mb/d in January. Crude arrivals were largely positive in January. Arrivals in the Far East increased 3% m-o-m and remained broadly in line with levels seen the same month last year. Arrivals in Europe were up 1% or 140 tb/d higher m-o-m but showed a stronger 9% or 1 mb/d increase y-o-y. Arrivals in North America were broadly unchanged from the previous month but were 12% or 1.3 mb/d lower y-o-y. West Asia was the only route showing a decline, down 200 tb/d or almost 5% m-o-m, but 130 mb/d or 3% higher y-o-y.
Dirty tanker freight rates
Very large crude carriers (VLCCs)
VLCC spot freight rates declined 17% in January, erasing the gains seen in the previous month to stand at WS79 points. The Middle East-to-East route has been up-and-down over the past four months, averaging WS93 points in January. Freight rates registered for tankers operating on the Middle East-to-West routes in January were down 16% m-o-m. At WS53 points, rates on the route were more than twice as high as the same month last year. West Africa-to-East routes in January also showed a similar pattern, down 17% m-o-m to stand at WS90 points, representing a gain of almost 60% compared to January 2019.
Suezmax average spot freight rates edged lower in January, declining 7% following a gain of 36% the month before. Y-o-y, Suezmax rates were 67% higher in January.
Rates for tankers operating on the West Africa-to-US Gulf Coast (USGC) route averaged WS130 points, representing a m-o-m decline of 8% in January. Y-o-y, however, rates were 68% higher in January compared to the same month last year. The Northwest Europe-to-USGC route edged down 3% m-o-m to average WS108 points, which was some 66% higher than the same month last year.
After a strong finish to the year, Aframax rates fell back some 7% to average WS119 points, but remained 42% higher than the same month last year. The Indonesia-to-East route was 18% lower to average WS151 points, but still represented a gain of 35% y-o-y. Both the intra-Med and the Med-to-Northwest Europe routes fell 24% to average WS151 points. Both routes, however, saw y-o-y gains of 15% and 9%, respectively. Only the Caribbean-to-US East Coast route enjoyed a m-o-m increase, up 29% to average WS320 points, which was 90% higher y-o-y.
Clean tanker freight rates
The clean spot tanker market declined for the first time since August, down 19% but still 7% higher than the same month last year. Clean tanker spot freight rates West of Suez averaged WS251 points, representing a decline of 20% since the previous month. The Mediterranean-to-Mediterranean and Mediterranean-to-Northwest Europe routes saw declines of around 24% to average WS214 points and WS224 points, respectively. Meanwhile, rates on the Northwest Europe-to-USEC route fell 8% to WS165 points. However, rates on West of Suez routes all showed improvements of up to 25% compared to the same month last year. On the East of Suez route, clean tanker spot freight rates fell 17% m-o-m in January to average WS170 points, with the Singapore-to-East route declining 14% m-o-m to average WS152 points, while the Middle East-toEast route declined 20% m-o-m to average WS130 points.
IMO 2020 – Lower Sulphur Means Higher Freight Rates
When we last looked at the IMO 2020 MARPOL Annex VI policy back in 2018 Q4, there were many sources of ambiguity in terms of the outlook. These included scrubber uptake, fuel options and availability, freight rates and the expectations on policy enforcement. As we approach the 1 January 2020 deadline for the policy, we have greater clarity on the likely impact of the policy on fuel prices. CRU’s view is that the IMO 2020 regulation is likely to raise freight rates by around 10-20%.
Scrubber uptake has been more prevalent than anticipated
From our discussions with Maritime Strategies International (MSI) and other active participants in the freight market, we now expect a higher uptake of scrubbers. We estimate that 20-25% of the larger Capesize vessels will have scrubbers fitted by end 2020. For the mid-size Panamax vessels, the uptake is lower at 5%. The smaller Handymax vessels are unlikely to install scrubbers at all. Considering the share of each type of vessel we calculate that in 2020, 10%-15% of total ocean-going freight capacity will employ scrubbers, rising to ~20% by 2025. More Capesize capacity will be fitted with scrubbers because the vessel size and the typical length of voyage mean a larger volume of fuel is burned making the capital investment and the pay-off period much more attractive. In addition, Capesize vessels generally travel on fixed routes between very large ports (e.g. Brazil or Australia to China), where the likelihood of the high sulphur fuel oil (IFO180) being available is greater than that of a small port.
We have revised our process for calculating the optimal time period over which the investment in a scrubber is expected to be paid off. We now consider only the difference in freight rates as the variable that will determine the optimal pay-off period. As a result, the pay-off period is now expected to be 12-18 months, on average. Of course, we expect this to vary between different shipowners for a variety of reasons.
Of the vessels fitted and due to be fitted with scrubbers, most have opted for the open loop option (where the exhaust gases are washed with sea water and discharged into the sea). This comes as a surprise as closed-loop scrubbers initially were considered to be more environmentally friendly as the ‘waste’ was instead disposed of after treatment at ports. However, since some studies have concluded that there is no notable negative environmental impact to using open loop vessels, many companies fitting scrubbers are willing to take the risk; they are assuming that there will not be a subsequent policy to remove open-loop scrubbers from operations any time soon. Open loop scrubbers cut down on installation and running costs, along with the logistics of carrying and disposing of the waste. There are some regions (Singapore and Fujairah) where an open loop scrubber is not allowed to operate, but until we see such controls at major ports such as Rotterdam, Qingdao and Newcastle the movement of bulk vessels will be largely unaffected.
Fuel blending will achieve compliance
Bunker fuel is a residual fuel of the oil refining process, it is cheap, has high sulphur content and has been the standard fuel used by the shipping industry. The most common types of bunker fuels are IFO 380 and IFO 180, in our work we have focussed on IFO 180. The IMO regulation will limit sulphur emissions and therefore requires shipowners to consider the options available to comply. Fuel blending will be key to achieving compliance. The extent to which fuel type needs to be changed depends on the extent to which emissions need to be cut.