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.
Tankers: What About Long-Term Demand? (11/12)
The tanker market is looking towards the oil demand and supply for future direction. In its latest weekly report, shipbroker Gibson said that “the IEA has recently released its long-term view of the energy markets. The agency presented different scenarios and cautioned that its outlook does not provide a forecast of what will happen; instead it offers several scenarios that explore different possible futures, depending on certain assumptions at government, industry and consumer level. The central case, referred to as the Stated Policies Scenario, incorporates today’s specific policy announcements; however, it does not include future policies that are needed to be fully aligned with the Paris Agreement”.
ccording to Gibson, “in this scenario, the IEA expects global oil demand to grow at a healthy rate of around 1 million b/d per annum through to 2025; however, the gains in consumption are expected to slow down dramatically thereafter, with just marginal growth projected beyond 2030, up by 0.1 million per annum through to 2040. Global gasoline demand will continue to grow modestly over the next decade but beyond 2030 it is anticipated to decline, down by 2 million b/d by 2040. Demand for diesel will see stronger growth through to 2025 but it is likely to remain virtually flat thereafter. Bigger gains are expected in demand for naphtha and jet fuel both in the medium and long term, driven by demand from the petrochemical and the aviation sectors. The IEA also expects stark differences to emerge in regional oil demand patterns. Demand in the advanced economies in North America, Europe and OECD Asia is expected to decline notably over the forecast period, while consumption in developing countries will continue to grow, although growth rates in some key countries also will slow down dramatically. In the long term, the biggest source of demand growth will be in the Middle East and India, with the expansion of the petrochemical sector in the Middle East fuelling regional consumption. In contrast, demand in China is likely to plateau in the 2030s, largely due to the widespread adoption of electric cars”.
The shipbroker said that “on the supply side, the IEA revised up its outlook for tight oil production in the US, despite concerns about slowing growth in output and the ongoing decline in rig count. By 2030, total US oil production is expected to reach 21.7 million b/d, up by 6.2 million b/d from 2018 levels. Gains are also expected in Brazil and Guyana. Beyond 2030, US output is likely to decline, but this will be largely offset by further increases in Latin America. Elsewhere, non-OPEC oil supply in Europe, Eurasia and Asia Pacific is anticipated to fall by 4.4 million b/d between 2018 and 2024”.
Gibson added that “major changes in the global refining industry are also expected. Some 15 million b/d of new refining capacity is projected to come online by 2040, mainly in Asia and in the Middle East, while refining runs in these two regions are anticipated to increase by over 10 million b/d, intensifying pressure on older plants to remain competitive. Most notably, refining runs in Europe could decline by 1.7 million b/d over the forecast period. In contrast, the combination of rising refining capacity and declining production in Asia is likely to translate into a substantial 10 million b/d increase in regional crude imports over the forecast period. These import requirements are expected to be met increasingly long haul from North and South America, although crude trade from the Middle East is likely to remain remarkably stable, in part due to the ongoing trend of Middle East producers investing in the upstream assets in Asia”.
The shipbroker concluded that “all in all, the latest IEA long term report suggests that the global oil markets are likely to be transformed over the next two decades, if all of the announced government policies are implemented. Yet, despite an anticipated dramatic decline in world oil demand growth, the picture is the opposite for crude tanker trade, with robust growth in tonne miles expected both in the medium and long term”.
Six new LNG tankers due to arrive in Northwest Europe
Six more liquefied natural (LNG) gas tankers are due to arrive in Britain, Belgium and the Netherlands this week, data from port authorities and Refinitiv Eikon showed.
* The Gaslog Savannah tanker, coming from the United States and with a capacity of around 153,000 cubic metres, is due to arrive at Britain’s South Hook terminal on Dec. 2, port authority data showed.
* The Maran Gas Lindos tanker, coming from South America and with a capacity of around 156,000 cubic metres, is due to arrive at the Dutch port of Rotterdam on Nov. 21, Refinitiv Eikon data showed.
* The Pskov tanker, coming from China and with a capacity of around 167,000 cubic metres, is due to arrive at Belgium’s Zeebrugge terminal on Dec. 14, Refinitiv Eikon data showed.
* The British Partner tanker, coming from Trinidad and Tobago and with a capacity of around 174,000 cubic metres, is due to arrive at Britain’s Isle of Grain terminal on Dec. 2, Refinitiv Eikon data showed.
* The Mesaimeer tanker, coming from Qatar and with a capacity of around 212,000 cubic metres, is due to arrive at Belgium’s Zeebrugge terminal on Dec. 8, Refinitiv Eikon data showed.
* The LNG Dubhe tanker, coming from Singapore and with a capacity of around 174,000 cubic metres, is due to arrive at Belgium’s Zeebrugge terminal on Nov. 25, Refinitiv Eikon data showed.
The Spike in Oil-Tanker Rates May Be Over, But a Boom Is Coming (15/11/19)
A surge in the cost of hiring oil tankers last month may already seem like a distant memory, but the rally was enough to convince analysts monitoring the industry’s fortunes that a couple of boom years are on the way.
Daily earnings for very large crude carriers, the market’s biggest vessels, will jump to $51,000 next year, according to a survey of 11 analysts by Bloomberg this month. As well as being the highest since 2015, their estimates are also up by 20% from what they were anticipating as recently as August.
Freight costs soared to a record in October on a combination of tensions in the Persian Gulf, sanctions on a giant Chinese shipowner, and vessels being removed from service in preparation for environmental legislation starting in January. While rates quickly slumped again, they remain high by industry standards. And the scale of the rally was enough to shift how analysts perceive the market.
“The recent surge in rates demonstrated how tight the vessel supply is,” said Randy Giveans, an analyst at Jefferies LLC in Houston. “The sector’s underlying, structural improvement will drive lasting rate strength year on year into 2020, with 2021 looking attractive as well.”
Key to the market’s strength in the coming years is fleet growth — or rather a lack of it, according to Giveans.
A total of 31 very large crude carriers, or VLCCs, were demolished last year, the most since 2002, according to Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker. It’s estimating fleet expansion of 3.2% in 2020 down from 6.1% in 2019. Beyond next year, a lack of orders for new vessels has also made several analysts more hopeful about rates, since it takes the best part of two years from ordering a ship to it being built.
As recently as July, rates measured in industry standard Worldscale terms stood at about 40 points for the market’s benchmark trade route to China from Saudi Arabia, according to the Baltic Exchange in London. They surged to a record of more than 300 points by October.
The surge got underway in late September after U.S. sanctions were imposed on units of China COSCO Shipping Corp., operator of one of the world’s largest tanker fleets, which took some of its ships off the market. There was also a rush for cargoes as traders fretted over crude supplies in the wake of attacks on vital Saudi Arabian infrastructure. Then, on Oct. 11, Iran said that missiles hit one of its ships in the Red Sea, further raising regional tensions.
“It would impact your thinking” to see such a sharp rally, said Lars Ostereng at Arctic Securities ASA in Oslo. Since some analysts are working on the assumption next year will be stronger than this year, the October rates surge may have influenced their thinking for 2020 as well, he said.
Part of the analysts’ bullishness also comes from environmental legislation that starts in January to limit shipping’s emissions of sulfur oxide, a pollutant blamed for aggravating human health conditions and causing acid rain.
Refineries will have to increase the amount of crude they process sharply in order to produce compliant fuel globally, something that would be very bullish for tanker demand if it materializes, said Espen Fjermestad, an analyst at Fearnley Securities AS in Oslo.
“The 2020 tanker story is already a robust one with increasing U.S. exports, higher refinery runs and decreasing vessel deliveries,” he said. “But the IMO fuel rule is taking it further to a new dimension.”
From Jan. 1, ships that haven’t installed an exhaust-cleaning system, or scrubber, will have to start consuming fuel with no more than 0.5% of sulfur. That’s down from a ceiling of 3.5% in most parts of the world today.
On some levels, the bullishness for next year is surprising since some of the drivers of the freight spike appeared short-lived. Companies that do business with the sanctioned Chinese owner were granted a wind-down period for their transactions, taking a degree of pressure off the freight market. At least some of the firm’s ships also started getting chartered again. The disruption in Saudi Arabia also proved less severe than early estimates, lessening a clamor for alternative barrels.
Nevertheless, the market’s showing signs of strength. Demand for VLCCs will grow next year by 5.7%, one of the strongest expansions in years, according to Clarkson. Flows should keep expanding from the U.S., which the International Energy Agency anticipates driving 85% of increases in production through the end of the next decade.
Healthy demand for oil will encourage flows across the Atlantic with greater exports also coming from the U.S., Brazil, and Norway, according to Ostereng at Arctic Securities.
“The Atlantic basin will be the incremental exporter of crude, whereas Asia will be the main importer,” he said. “If you map that up you’ll end up with a situation where every barrel will need to travel some distance and that should be good for tanker demand.”
IMO 2020 is coming (14/11/2019)
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In the first of a three-part series, Suzanne Danforth and Amanda Fairfax examine the implications of IMO 2020 — past, present, and future — with an initial look at the state of the US distillate supply/demand balance.
As the weather turns colder in North America, the refined products market focus turns to distillate products. The fall season typically brings diesel demand, seasonal refinery maintenance, and expectations for how winter heating demand will shape the distillate supply/demand balance. This year the upcoming implementation of the International Maritime Organization (IMO) 2020 bunker fuel regulations adds another price-impacting factor to the mix, with the IMO set to lower bunker fuel sulfur specifications for ships globally from 3.5 percent sulfur to 0.5 percent sulfur on January 1, 2020.
Generally, the market expects that middle to heavy distillates, from consumer-grade ultra-low sulfur diesel (ULSD) to refinery feedstock low sulfur vacuum gasoil (LVGO), may be utilized as a replacement fuel for 3.5 percent bunker fuel, or used in bunker fuel blends to lower sulfur content.
US East Coast inventories fell on PES shutdown, fall maintenance, rising demand
US East Coast distillate inventories fell to 33.95mn bbls for week ending October 25, according to weekly EIA data, a record low for the fourth week in October. Conversely, EIA US Gulf Coast distillate stocks rose to 43.6mn bbls for the same week, the highest seasonal levels since 2012 for the region. For week ending November 1, this disparity narrowed slightly, with PADD 3 stocks falling 2.8mn bbls from the previous week to 41.8mn bbls and PADD 1 inventories rising by 2.6mn bbls to 36.6mn bbls, led by inventory gains in the US southeast (PADD 1C). However, weekly EIA distillate stocks for PADD 1B continued to fall for week ending November 1 to 16.6mn bbls.
This disparity between the two regions is unusual and related to several factors – distillate demand growth in PADD 1, reduced export levels out of PADD 3, PADD 1 fall refinery maintenance, and the shutdown of Philadelphia Energy Solutions’ (PES) 335,000 bpd Philadelphia refinery this summer following a fire. Colonial allocated its 1.2mn bpd Line 2 Pipeline starting in October, which carries distillate fuels from the US Gulf Coast to destinations throughout the US East Coast region. This is a typical seasonal occurrence exacerbated by reduced production and demand growth in PADD 1. With Colonial Line 2 full, the flow of distillates via pipeline into PADD 1B – the market hub for the Northeastern US — is at a maximum level, meaning that additional supplies may need to come via waterborne deliveries to balance the market if demand shocks occur.
PADD 3 vs. PADD 1 Distillate Inventories
New York Harbor (NYH) heating oil/diesel inventories also fell to record seasonal lows in October, according to our data, which goes back to November 2013 when we first started to monitor NYH. NYH heating oil and diesel stocks fell to 5.37mn bbls for week ending November 1, dropping below levels observed in 2017, when Hurricane Harvey impacted US Gulf Coast refinery utilization and flows of refined products from PADD 3 to PADD 1. For week ending November 1, NYH heating oil/diesel storage capacity utilization dropped to just 29.2 percent, according to our data.
New York Harbor Heating Oil/Diesel Inventories, 2017 to 2019
As a result of lower stock levels and expectations for increased distillate demand globally starting in 2020, prices for CME front-month NYH ULSD rose as high as $1.9863/gal October 24, up nearly $0.10/gal from the beginning of October. Spreads between ULSD futures and front-month CME Light Sweet Crude (WTI) futures stayed buoyant over the last year above $20/bbl, even in the summer when diesel demand is typically lighter than other periods of the year. In terms of time spreads, December 2019 CME ULSD futures widened to as much as $0.0564/gal premium to the March 2020 contract month October 8. Backwardation is typically seen in the winter, but this spread widened in recent months ahead of IMO 2020 implementation and expectations for increased diesel demand for both winter heating and bunker fuel blending. As of November 4, the December/March ULSD futures spread was $0.035/gal. A backwardated structure in commodity futures time spreads is usually indicative of a tightly supplied market, where prompter prices command a premium to forward prices.
CME ULSD Futures and Light Sweet Crude Futures, October 2018 to Present
Fall 2019 refinery maintenance season in the US East Coast brought utilization rates to two-year lows, as 2018 rates for primary processing, middle distillate, and heavy product processing stayed near 100 percent throughout that year, according to our refinery monitoring data. Inclusive of the PES Philadelphia refinery, which remained fully shut since early August, primary processing utilization in PADD 1 dipped to a seasonal low of 59.7 percent on September 30, and middle distillates utilization fell to 43.4 percent October 1. Our Refinery Stream Monitor, which aggregates crude and downstream inputs to refineries based on crude unit operations and secondary unit impacts, calculated crude runs in the East Coast at a seasonal low of 700,000 bpd for week ending October 11.
PADD 1 Refinery Utilization and Inputs
Distillate demand remained buoyant in PADD 1 for 2019 versus previous years. Our Supply Side Prime Normalized data – where daily rack activity is adjusted via EIA Prime Suppliers to reflect full rack market coverage – showed monthly demand up 1.7 percent and 2.4 percent for September and October, respectively, vs. EIA Prime Suppliers in 2017. Elsewhere in the US, fall distillate demand contracted in PADD 2 amid a weaker crop harvest season. PADD 3 experienced changes in demand due to declining rig counts and demand for diesel to transport drilling equipment, materials, and produced crude. As a result, total US diesel demand for October was 3.6 percent below 2017 levels, according to our Supply Side data.
Supply-Side Prime Normalized No. 2 Diesel 2019 vs. EIA Prime Suppliers 2017
Looking ahead, forecasts for winter temperatures in the coming months are varied. The 2020 Farmers’ Almanac is calling for colder-than-normal temperatures in the northeastern US (PADD 1A and PADD 1B), along with above-normal precipitation. In contrast, the National Oceanic and Atmospheric Association (NOAA) is predicting warmer-than-average temperatures for most of the US but warns that some areas may experience a colder-than-average winter. Above-average precipitation is expected to the northern tier of the US, according to NOAA, which, combined with swings in the Arctic Oscillation, could lead to large variability in temperature and precipitation.
Looking Ahead to January
The challenges in predicting winter heating demand for distillate, coupled with the uncertainty of how IMO 2020 implementation will affect distillate supply/demand balances and product flows in the US and globally, highlight the importance of our near-real-time fundamental data. Any changes in supply and demand trends could have a significant effect on price. In addition, the crude oil supply market is changing, as the availability of heavy crudes is decreasing and demand for lighter crudes is increasing. These fundamental changes compound the complexity of refinery future margins.
Product Tankers In Line for Major Profits (07/10)
The product tanker market is primed for a strong finish to the end of the year, as predicted. In its latest weekly report, shipbroker Gibson said that “with most crude tanker markets surging to multi-year highs, many have questioned whether the clean sector should expect to experience the same fortunes. The last few days have seen product tankers firm both East and West, in some cases considerably. Now, many are questioning whether this recent firming the start of a more sustainable trend or merely a short-term blip?”
According to Gibson, “great faith has been placed in IMO2020, particularly in terms of its impact on distillates trading. However, can owners still realistically expect this seismic event to transform prospects in the clean tanker sector over the coming months? To answer this question, it is first important to look at how expectations for demand for the different types of compliant fuels have evolved since the convention was first ratified back in 2016. Initially, a consensus opinion emerged that marine gasoil (MGO) would offer the primary route to compliance in the early days of 2020, and with a surge in demand for gasoil, clean product tankers would stand to benefit from increased trading opportunities. This theory is still valid. However, the supply of 0.5% fuel oil (VLSFO) appears to be improving, with an ever-increasing number of suppliers now offering the fuel on a regular basis. If more VLSFO is available than originally anticipated, it would seem logical that MGO demand growth expectations might need to be pared back. However, even if VLSFO supply does exceed initial expectations, industry estimates still point towards an increase in MGO demand of 1 to 2 million b/d, with the transportation of gasoil and other blending components still supporting trade. What is unclear, however, is the impact on tonne miles in terms of how much product will be traded long haul versus retained locally for bunkering demand. In any case, increased products trading activity around IMO2020 should be a supportive, even if it isn’t obvious just yet”.
Meanwhile, “fleet supply factors are also likely to be having an impact. Not only have newbuild product tankers been a constant factor this year, but so have newbuild crude tankers entering the clean products market on their maiden voyage. However, a bullish crude tanker market is likely to deter this activity in the short term. Finally, the recent strength of the crude market has also attracted a number of product tankers to ‘dirty up’, which may constrain product tanker fleet supply and thus support clean freight rates”, the shipbroker said.
Gibson added that “however, a key factor weighing on product tanker demand is that of world oil demand which has already been revised down on a number of occasions and could be trimmed further. As it stands, demand is projected to average 1.3 million b/d in 2020, which if it holds true, will mark a modest increase from this year’s 1.1 million b/d growth rate. Furthermore, with IMO 2020 driven distillate demand potentially growing at a faster rate than total oil consumption (due to contractions in fuel oil use), product tankers may largely be insulated from any slowdown in total demand”.
“Finally, on the refining side, higher refinery runs are expected for the remainder of the year and into 2020 (notwithstanding some seasonal maintenance). Refining runs for May to July this year fell versus the same period of 2018 but are expected to firm substantially over the coming quarter, growing by 1.4 million b/d YOY. Thus, a strong end to the year in terms of refining runs, the implementation of IMO2020 and the potential for more favourable fleet supply conditions could all support product tankers towards the end of 2019 and into 2020”, Gibson concluded.
Tanker Market: Will it End 2019 With a Bang? (01/10)
Tanker freight rates have rallied during the past few weeks, in the aftermath of the attacks on Saudi Arabia’s oil facilities. With production now almost reaching pre-strike levels, it seems that the tanker market is primed for a sustainable rally, as the traditionally strong fourth quarter has officially began. In its latest weekly report, shipbroker Gibson said that “at the time of writing this report, spot TCE earnings on most benchmark crude trades stood at or close to their highest level this year, after firming spectacularly over the past two weeks, in part on the back of the attacks on Saudi oil infrastructure. This week’s US sanctions on two Cosco subsidiaries added more fuel to the fire. The current strength in rates has been triggered by geopolitics; however, both demand and supply factors suggest tightening tanker supply/demand balance as we approach the 4th quarter of the year”.
According to Gibson “weather related delays and disruptions traditionally offer seasonal support during the period to rates across all segments. For Suezmax and Aframax tankers, delays for passage through the Turkish Straits help to tighten tonnage availability and support earnings on regional trades. The 10-year average for both northbound and southbound delays for passing through the Straits stands at 10 days in Q4 versus 3.7 days in Q3. There are also fundamental factors. Global crude refining runs tend to increase in order to accommodate stronger demand during the winter season. This year, the approaching global sulphur cap on marine bunkers is anticipated to offer an additional boost to refining runs, with demand for distillates being the key driver. According the latest IEA monthly report, global crude refinery throughput is projected to average 83.7 million b/d in Q4 2019, up by 1.4 million b/d year-on year and up by 400,000 b/d quarter-on-quarter. While stronger demand from refineries is anticipated, the expectations are for substantial increases in crude production in the Atlantic Basin. US crude production is projected to average 12.78 million b/d in Q4, up by more than 0.5 million b/d versus the previous quarter (EIA). Pipeline capacity from the Permian Basin to the US Gulf is also expanding. 670,000 b/d Cactus II pipeline started initial operations, while 400,000 b/d Epic pipeline also commenced filling the line. Both lines are expected to ramp up throughput and export capabilities through the 4th quarter of the year. Furthermore, 900,000 b/d Gray Oak pipeline is projected to begin operations in Q4 2019. All of the above suggest strong potential for robust growth in US crude exports during the last three months of the year”.
The shipbroker added that “meanwhile, across the Atlantic expectations are for sizeable increases in North Sea crude supply, following the start-up of the massive Johan Sverdrup oil field in Norway. Initial loading program shows 12 Aframax cargoes planned for October. Elsewhere, preliminary Urals loading program for October also shows a rebound in Russian crude exports out of the Baltic. This indicates an increasing surplus of crude supply in Europe, with the Johan Sverdrup start-up and more US barrels being shipped into the region being the key drivers. As refinery crude runs in Europe could remain under pressure due to economic turbulence, surplus regional production – North Sea, Black Sea/Mediterranean, Baltic or West African barrels are likely to flow on an increasing basis long haul to the East, translating into higher demand for larger crude carriers”.
Gibson concluded that “while demand is projected to increase, there are also some positive indications on the tanker supply side. There are still 22 VLCC deliveries outstanding until the end of the year, but only 4 Suezmax and 9 Aframaxes/LR2 deliveries remaining. The market will also continue to benefit from scrubber retrofits taking place, with tonnage temporarily out of trading operations. Spectacular spikes in tanker rates have a tendency of being short-lived. Only time will show how long the current strength in the market will last. However, with market fundamentals improving in the 4th quarter, there is indeed potential for rates and earnings to maintain at least some of the latest gains”.
Tanker Market Looking Good Entering Fourth Quarter (27/09)
It’s never boring in the tanker market and 2019 has been no exception, with rates rising – for the most part, but the way they did that was never going to be straightforward, with so many factors, most notably geopolitical ones, entering into play. Still, things are looking rosy ahead of the traditionally strong fourth quarter.
In its latest weekly report, shipbroker Allied Shipbroking said that “with just one week to go before we officially enter the last quarter of the year, uncertainty has once again returned to the tanker market after the recent developments in Saudi Arabia, reminding everyone that geopolitical tensions in the region still linger around and be a cause for unforeseen disruptions. The year began with OPEC being modestly optimistic, stating that oil demand is expected to reach the 100.08 mb/d in 2019, increased by 1.29 mb/d compared to 2018, with prospects back then showing that India, China as well as other SE Asian countries will lead on this oil demand rally. However, as we were reaching the end of the first quarter, all forecasts were revised downwards by OPEC, declaring that the estimated growth rate declined to 1.24 mb/d (99.96 mb/d average demand for 2019)”.
According to Allied’s Research Analyst, Mr. Yannis Vamvakas, “the slowdown in growth noticed in the global economy and the increasing uncertainty as part of the US-China tariff war has also dragged down oil demand. Given these facts and with seasonality playing its part as well, it was of little surprise that we saw the average TCE for all crude oil segments posting losses compared to the previous quarter. However, looking at it from a more optimistic angle, the figures witnessed were much better than the respective rates seen back in 2018”.
He added that “moving on to the second quarter, oil demand forecast by OPEC were revised further down, as key oil importers, such as China and India continued showing signs of economic weakening. The growth estimate for world oil demand for 2019 fell to 1.14 mb/d (99.86 mb/d production in total). With the ongoing trade disputes and new tensions rising between Iran and the US, business and consumer sentiments slumped further, darkening the overall market outlook. As a result, freight rates also dropped in the second quarter, with VLCC average TCE reaching US$1,919 (down from US$13,826 in Q1), Suezmax average TCE reached US$13,166 (down from US$19,521 in Q1) and Aframax average TCE closed at US$9,757 (down from US$17,052 in Q1). Once again though, these figures were an improvement compared to their respective figures in 2018. During the third quarter, oil demand forecast by OPEC fell even further, with their latest report showing that oil demand growth in 2019 will be a mere 1.02 mb/d, reaching 99.84 mb/d in total production. At the same time, EIA cut its oil demand growth forecast as well to 900,000 bpd, a noticeably soft figure, as if it were to be the case it would mark it as the first annual growth figure below 1 million bpd since 2011”.
Vamvakas also noted that “it is worth mentioning though that freight rates improved significantly compared to Q3-2018, as shorter tonnage lists in key regions helped markets move upwards. Average y-o-y growth rates stands at 5% for Aframax, 39% for Suezmax and 2499% for VLCC. Crude tanker freight rates have showed improvement compared to 2018, but remaining below their long run averages, we expect the same pattern to follow in the final quarter. We don’t expect any significant changes to take shape on the supply side during the following months, with 103 units scheduled to enter active service over the next couple of months, much lower than the 126 vessels delivered in 4Q18. The paper market is also sharing this bullish sentiment, with Q4 contracts on the rise. Finally, it is worth mentioning that the average rise in rates noted during Q4 over the past 3 years has been 138% for Aframaxes, 162% for Suezmaxes and 315% for VLCCs, fact that further enhances the bullish sentiment, even if demand growth ends up less than what was expected at the start of the year”, Allied’s analyst concluded.
Long-Term Outlook Positive for Product Tankers (23/09)
With big changes coming in the refinery landscape in the future, ship owners active in the clean tanker market stand to benefit from longer ton-mile demand. In its latest weekly report, shipbroker Gibson said that “over the next 5 years, the global refinery landscape will continue to evolve, with the IEA projecting that over 9 million b/d of new capacity will be added, roughly twice the level of refined products demand growth over the same time period. With over two thirds of new capacity being added East of Suez, pressure will grow on older, less complex refineries, many of which are located in Europe. Structural changes in global oil products demand and crude supply will also significantly impact on refining margins and arbitrage, not just in Europe, but globally. In the short term, less complex refineries may lag behind, as new regulations come into play, particularly those that lack the ability to upgrade or desulphurize fuel oil. Some may turn to lower sulphur crudes although price premiums for these grades are likely to rise, impacting upon margins. However, as the refining landscape recalibrates post 2020, other structural changes will come into play. Gasoline exports have proved a key source of profitability for European refineries. However, demand growth is expected to slow in the Atlantic Basin, whilst the potential start-up of Aliko Dangote’s Lekki refinery also threatens to starve off a key outlet for European gasoline”.
According to Gibson, “ultimately, many of the older and less complex refineries in Europe will come under increased regulatory and competitive pressure over the next five years, having to deal with IMO2020 and then fight off competition from newer, more efficient plants, located either close to major demand centres, or close to key sources of feedstock supply. This of course a generalisation, many plants in Europe have invested in cokers, hydrocrackers and solvent de-asphalting units to aid the production of higher quality fuels, whilst there will still be significant exports and regional demand for European products. Nevertheless, newer/more efficient plants in the US, Asia and the Middle East will pressure European Refinery runs lower by 2024, with the IEA projecting a 900,000 b/d decline. Even if global oil products demand surprises to the upside, there is still likely to be excess refining capacity”.
“Changes in the European refining scene will also impact crude trade flows at a time when North Sea crude production is expected to rise. By 2024, Europe is expected to see its crude production increase by 440,000 b/d. However, with refinery utilisation projected to fall, crude exports from the region look set to increase. Imports into the region are also expected to ease back, boosting the overall crude surplus in the Atlantic basin. With the majority new refining capacity being added in the East, shipowners stand to gain from stronger tonne mile demand growth, although shorter and medium haul trading opportunities may well diminish”, Gibson concluded.
Meanwhile, in the crude tanker market this week, in the Middle East, Gibson said that “the week started with a degree of uncertainty after the weekend attack. On the back of this, both some VLCC Owners and Charterers held back until there was some clarity as to how the market would react. One Chinese Charterer dominated the amount of fixing throughout the week, proved to be a wise move. As the week progressed, rates have started to rise gradually. Last done is 270,000mt x ws 69.5 for Far Eastern destinations. With muted interest for Western destinations, it is nearer to mid ws 30’s on 280,000mt. The attacks in Saudi caused mixed reaction from Suezmax Owners; some were hesitant to engage but not enough to alter the scene completely. The more compelling story is action elsewhere and Owners ballasting away from the MEG, which will likely lead to a tonnage deficit further down the line. Rates have settled in the mid ws 30’s for TD23, with upside on the horizon heading into next week. Levels to the East hover around 130,000mt x ws 90. Aframaxes in the AGulf began the week looking flat, trading sideways at 80 x ws 100 levels. However, behind the scenes the market makers were rapidly looking to take cover and by Tuesday/Wednesday an influx of cargoes had flooded the market. Rates are up to 80 x ws 120 for AGulfEast, with potential for further gains”, the shipbroker concluded.
Historic disruption to Saudi oil supply to have severe implications for oil and tanker markets (20/09)
Global spare production capacity is not enough to compensate for the decline in Saudi Arabia’s oil production after the recent attacks on two of the country’s oil facilities and the consequent inventory drawdown will therefore underpin oil prices and adversely affect tanker demand if supplies take longer to be restored.
The oil market lost about 6% of global supply in the biggest single disruption ever, when drone strikes on two critical oil facilities in Saudi Arabia knocked reduced oil production in the Kingdom by about 5.7 mbpd on 14 September. The explosions set off fires at the Abqaiq oil processing facility (7.0 mbpd capacity) and the nearby Khurais oil field (1.5 mbpd capacity), halting more than 50% of the country’s production.
While Yemen’s Houthi group claimed responsibility for the attack, the US put the blame squarely on Iran. Saudi Arabia’s oil infrastructure has been hit by the Houthis many times before, but there has not been any disruption in supply. This latest attack, which follows last month’s drone attack on the Shaybah natural gas liquefaction plant and attacks on two oil pumping stations in May, highlights the vulnerability of Saudi Arabia’s oil infrastructure to Houthi attacks.
Although the fire at both the facilities is now under control, it is still not clear how long it will take to fully restore 5.7 mbpd of production. Other OPEC producers have spare capacity of around 0.8 mbpd, but it will not be enough to compensate for the big drop in the Saudi output. In addition, the spare capacity will take time to come online. Therefore, the disruption to about 6% of global supply will have severe implications for the oil and tanker markets if Saudi Arabia’s oil supply remains affected for long. Asia Pacific buyers will be particularly affected as they account for about 70% of Saudi Arabia’s total crude exports of around 7 mbpd.
While Saudi Arabia is planning to use oil from its storage facilities to partly compensate for the supply disruption, the oil market will be in short supply as long as the production remains affected. The country has about 188 million barrels of crude oil stock, which is equivalent to about 26 days of its exports. If Saudi Arabia taps its oil inventories to compensate for half of the total loss in production, there will still be a supply deficit of about 2.8 mbpd.
In such a situation, if Saudi’s supply remains affected for one week, there will be a modest decline of 10 VLCC loadings in the Arabian Gulf during this period. If other producers in North America, Latin America and Africa manage to compensate for the shortage in Saudi Arabian supply in the short run, the crude tanker market will be positively impacted as tonne-mile demand for VLCCs will increase, with most of the supply moving to Asia.
However, if the Saudi Arabian crude oil supply remains affected for one month, the global oil and tanker markets will be severely impacted. Although the country’s inventory of 188 million barrels can fully compensate for the 5.7 mbpd drop in supply for one month, this is highly unlikely as it will exhaust most of Saudi Arabia’s crude oil stocks. If the supply remains affected for one month and Saudi Arabia manages to meet half of the disrupted supply through inventories, the country’s crude oil inventories will come down to around 100 million barrels. But as the remaining half of the global supply will come from inventory drawdown outside Saudi Arabia, it will lead to a significant decline in the demand for tankers. Since the average haul-length of Saudi Arabian crude is about 5,500 nautical miles (NM), the drop of 2.8 mbpd in the country’s exports for one month will render more than 50 VLCCs unemployed over this period. In such a situation, while oil prices will surge, freight rates in the crude tanker market will come down significantly.
Tanker Market in Limbo After Latest Attack on Oil Facilities (18/09)
More tanker market turbulence should be expected in the coming weeks, as a result of the latest drone attacks, this time on Saudi Arabia’s oil facilities. In its latest weekly report, shipbroker Banchero Costa said that “on Saturday, September the 14th, a reported drone attack occurred on Saudi Arabian oil processing facilities at Abqaiq and oil production facilities at Khurais. Saudi Arabia is the world’s biggest oil exporter. The incident resulted in production suspension of 5.7 mln bpd of crude oil, which is almost 60% of the Kingdom’s 9.63 mln bpd production in August 2019, and about 5% of global supply. Saudi Arabia’s return to its full oil supply capacity could take “weeks not days”, a source close to the matter told Reuters on Sept 15th”.
The shipbroker noted that “according to Aramco, the Abqaiq facility is the largest crude oil stabilization plant in the world, processing more than 7 mln bpd of crude. Considering the plant plays a vital role in removing the sulphur impurities and reducing the vapor pressure of the crude in order to make it safe for being transported by tankers, exports from the Kingdom’s main terminals of Ras Tanura and Juaymah could be expected to have an impact, if there is an extended delay in bringing the facility back into operation. This was seen in the number of ships that have lined up at the port’s waiting anchorage, which have increased from just 5 ships waiting to load on Thursday (12th Sept) as per the port line up to at least 16 VLCC’s waiting on Sunday morning (15th Sept)”.
According to Banchero Costa, “oil prices surged on Monday, September 16th, with Brent recording its biggest intra-day percentage gain (19%) since the Gulf War in 1991, but later corrected downwards after U.S. President Donald Trump said he had authorised the release of oil from the U.S. Strategic Petroleum Reserve. The attacks on Saudi oil installations on Saturday are unlikely to reduce the Kingdom’s oil exports dramatically since it holds a significant amount of crude oil and petroleum products in storage. Aramco has the option to draw on the Kingdom’s 188 million barrels of reserves to maintain exports of 7 million barrels per day that mostly go to Asia”.
The shipbroker added that “however, the accident could again add a significant risk premium to oil prices in the medium term, especially as it reduces the inventory and spare capacity cushion, which plays a key role in price formation. The world’s oversupplied oil market certainly has some scope to absorb a short-term shock. Developed economies’ oil stocks are above five-year averages, and the combination of a global economic slowdown and increased output by other countries means that OPEC was already considering to voluntarily further cut back on production. However, most of the world’s spare capacity is in Saudi Arabia itself. The attack also constrained Saudi Arabia’s ability to use the more than 2 million bpd of spare oil production capacity it held for emergencies. The Kingdom has for years been the only major oil producing country that has kept significant spare capacity. Before the attack, OPEC’s global supply cushion was just over 3.21 mln bpd, according to the IEA. Saudi Arabia – the defacto leader of OPEC – had 2.27 mln bpd of that capacity. That leaves around 940,000 bpd of spare capacity, mostly held by Kuwait and the United Arab Emirates. Non-OPEC members such as Russia are pumping near capacity, with perhaps only 100,000-150,000 bpd of available additional production. Shale producers in the USA could arguably rise production, but there are constraints on how much the United States can export because oil ports are already near capacity”, Banchero Costa concluded.
Tanker Shipping: A Boost From The 2020 Sulphur Cap Will Not Make Up For A Fast-Growing Fleet (18/09)
Even with the sulphur cap expected to give a boost to the tanker market, high fleet growth will put pressure on earnings.
Demand drivers and freight rates
Rising geo-political tensions have led to disruptions to the tanker shipping industry and all other ships trading in the Persian Gulf. Tensions have risen following the expiry of waivers to the US imposed Iran sanctions, as well as attacks and arrests of ships sailing through the Strait of Hormuz.
Despite the ending of waivers which the US had hoped would lead to all countries stopping their imports of Iranian crude oil. This has not been the case with the Chinese in particular continuing; their crude oil imports from Iran totalled 11m tonnes in the first six months of the year. This is 30.1% lower than last year and imports have slowed throughout the year; averaging 2.3m tonnes in the first 4 months but subsequently slowing to 1.1m tonnes in May and 0.9m tonnes in June.
Exact data for Iranian crude oil exports does not currently exist. Reuters has reported that a Trump administration official estimates that 50-70% of Iranian’s crude oil exports are for China and around 30% go to Syria. The now renamed Adrian Darya 1 (formerly Grace 1) was arrested while believed to be sailing with crude oil from Iran to Syria, in breach not only of US sanctions against Iran, but also EU sanctions against Syria.
Tensions remain high in the Persian Gulf, where a US-led mission to ensure the security of international ships when transiting the Strait of Hormuz has so far been joined by the UK, Australia and Bahrain. Iran’s President Rouhani has been quoted by Reuters as issuing a veiled threat that, should Iran’s crude oil exports be forced to zero, security in international waters could not be guaranteed.
In reaction to the first attacks, on two tankers transiting the Strait of Hormuz in June, crude oil freight rates from the Persian Gulf to China doubled over the course of a few days, as BIMCO reported. They soon returned to previous levels as it became clear that despite the added risk, maritime operations would continue at close to normal levels and shipowners would have to absorb the higher insurance cost.
There was a sudden jump in earnings for the largest crude oil tankers in August, with VLCC earnings reaching their highest point of the year at USD 37,239 per day on 16 August. Earnings for the smaller vessel sizes have remained much more stable, and after falling fast at the start of the year, Suezmax earnings have averaged USD 16,716 per day between June and August, while an Aframax tanker has in the same period earned an average of USD 12,215 per day.
Oil product tanker earnings have been volatile over the summer, falling to below USD 10,000 per day for all vessel sizes in July, but have since risen again, with LR2 rates reaching USD 21,542 per day on 9 August, and at the end of August, remain above USD 19,000 per day.
US exports of finished petroleum products were down 4.5% in the first five months of the year. A longer than usual refinery maintenance season which was brought about to allow refineries to produce the low sulphur fuel oil needed by the maritime industry come 2020 by avoiding further maintenance shutdowns which are traditionally performed in the last few months of the year. Exports of finished petroleum products have so far this year averaged 3.3m bpd.
By the middle of August, the total tanker fleet has already grown by 4.3%. Growth in the crude oil tanker fleet is particularly high with BIMCO expecting full year growth of 5.3%. The higher fleet growth comes not only from increased deliveries, but also from slower than expected demolitions.
Only 2.1m DWT of crude oil tankers has been demolished so far this year, in response BIMCO has lowered its expectations for crude oil tanker demolitions in 2019 from 9m to 4m DWT.
In contrast to the disappointing demolitions, ordering has picked up. New orders for the total tanker fleet have increased to 13.1m DWT. Since May 6 VLCCs of 300,000 DWT or more have been ordered as well as 30 Aframaxes. As BIMCO expects the total tanker fleet will grow by 5% this year, the already over supplied market has no need for extra ships, and further ordering will only worsen future market conditions.
Demolitions of product tankers have also slowed down through the year, with owners preferring to keep their tonnage active in the hope of benefitting from additional demand for oil product tankers as we approach IMO 2020, and new low sulphur fuel types are made available around the globe. BIMCO expects this will provide a much-needed boost to demand for tanker shipping.
With only 0.6m DWT having left the oil product fleet, deliveries of 6.4m DWT has meant fleet growth of 3.5% this year, with BIMCO expecting full year fleet growth of 4.4%. Even with a demand boost to the oil product tanker shipping sector expected to come, this high fleet growth will put pressure on earnings.
Recently contracting activity has slowed down in the oil product tanker market, with only nine MRs being ordered in June and July. The orderbook for oil product tankers now stands at 11.9m DWT, which is 15.9% lower than in August 2018, as more has been delivered than ordered in the past twelve months, a positive trend to be continued to enable a return to a more balanced market.
In July OPEC+ ministers announced that they would maintain their current output restrictions, of 1.2m barrels per day (bpd), aiming at reducing high stocks in an oversupplied market. The US has continued to increase its crude oil production and exports, with seaborne exports reaching a new record high of 11.9m tonnes in June. South Korea became the largest importer of US seaborne crude oil exports, after China all but disappeared from the market as its relationship with the US soured.
Chinese crude oil imports from the US fell by 76.2% in the first six months of the year. Over the same period, total Chinese crude oil imports are up 8.8% reaching 244.6m tonnes. Saudi Arabia has overtaken Russia as the largest supplier of crude oil to China, the two nations sent 37.8m and 37.7m tonnes respectively in the first half of the year.
The increase in volumes from Saudi Arabia of 10.5m tonnes is good news for the shipping industry, as most Russian crude oil exports to China are through pipelines, and therefore have no effect on the crude oil tanker market.
Although Chinese imports from Saudi Arabia boost the shipping industry more than those from Russia, a resolving of trade tensions and a return of Chinese buyers to the US crude oil market would provide an even larger boost for crude oil shipping, as it would increase tonne mile demand.
Another boost to the industry comes from the ramping up of refined oil product exports around the world as the traditional Autumn maintenance season will be shorter, and volumes won’t fall as much as usual. As refineries start producing and selling low sulphur fuel, oil product tankers will be employed to transport the product to where it is needed.
Any further escalation of the situation in the Persian Gulf, as Iran has hinted could come should their exports be forced to zero, would have a severe impact on the tanker shipping industry as around half of all seaborne crude oil is transported through the Strait of Hormuz. Should it be further threatened, or outright closed, the tanker market would face severe consequences.
Tanker Market “Hostage” of Financial Turmoil (16/09)
The turmoil in the global economy is taking its toll in the tanker market, with demand for oil expected to take a turn for the worse. This is expected to have a negative impact in demand for crude oil tankers as well. In its latest weekly report, shipbroker Gibson said that “global oil demand looks set to grow at a slower pace than first anticipated, many energy analysts have concluded. Since the start of the year, many forecasts for the immediate future have frequently been downgraded as global trade wars and disappointing economic performance weigh on their decisions to downgrade forecasts”.
According to Gibson “the EIA said in its latest Short-Term Energy Outlook that it expects oil demand to grow by just 900,000 b/d in 2019, following a series of downgrades earlier in the year. In July, it said 2019 demand would grow by 1.1 million b/d, while at the start of the year the expectations were for oil consumption to grow by 1.5 million b/d in 2019. It isn’t just the EIA downgrading forecasts. OPEC on Wednesday cut its outlook for growth in world oil demand both in 2019 and 2020 due to an economic slowdown. The producer group also said that these projections highlighted the need for ongoing efforts to prevent a new glut of crude. The report stated that global oil demand would expand by 1.08 million b/d next year, 60,000 b/d less than previously estimated. The expectations were also lowered for world economic growth in 2020, from 3.2% to 3.1%. Furthermore, OPEC indicated that the market would be in surplus and that next year’s increase in oil demand would be outpaced by “strong growth” in supply from rival producers such as the United States. On this basis, demand for OPEC crude will average 29.40 million b/d in 2020, down 1.2 million b/d from this year’s level. Analysts this week also reported stocks in July exceeding the five-year average by 36 million barrels, a measure OPEC watches closely”.
“In addition, OPEC reported that despite voluntary production cuts, its output rose in August, by 136,000 b/d to 29.74 million b/d. It was the first increase this year, as Saudi Arabia, Iraq and Nigeria all boosted supply. Saudi Arabia alone raised its production by just over 200,000 b/d to 9.79 million b/d, but it must be stressed that the country continues to pump far less than its quota of 10.31 million b/d. Losses from Iran and Venezuela are helping with supply reductions; however, last month’s increase puts OPEC output further above the 2020 demand forecast. The report suggests that if OPEC keeps pumping at August’s rate and other things remain equal, there will be an oversupply of 340,000 b/d next year”, Gibson said.
The shipbroker concluded its analysis by noting that “oil prices continue to linger around the $60/bbl mark, down from April’s peak of $75/bbl, despite extensive OPEC+ production cuts. Large economies are constrained by geopolitical uncertainty, which is causing markets to stall. Until a trade breakthrough is reached between the US and China and other political uncertainties around the globe are tidied up, the world economy will continue to look fragile and behave unpredictably”.
Meanwhile, in the crude tanker market this week, Gibson said that in the Middle East, “VLCCs agitated for improvement as the market moved into the final phase of the September programme but although the top end of the range was slightly prised open, there wasn’t quite enough volume to tighten sufficiently to allow for a mass break-out and holidays in the Far East end the week also compromised. It’s all about October next week, but ‘start again’ for the market. Rates to the East moved to a peak ws 53.5 to China on modern, with rare runs to the West marked in the mid ws 20’s, via Cape. Suezmaxes had very little to chew on and merely maintained a very flatline front. Rates again compressed to ws 27.5 West, and to ws 70 to the East, with no early change likely. Aframaxes slid along, and then eased a little to 80,000mt by ws 97.5 to Singapore with a slow feel persisting”, the shipbroker concluded.
Tanker Market Flat During August (14/09)
The tanker market was broadly unchanged during the month August, according to the latest OPEC report. Dirty vessel spot freight rates were broadly flat in August as gains in VLCCs were outweighed by declines in average rates for Aframax and Suezmax. A pick up in tonne-mile demand and reduced deliveries supported the VLCC market at the start of the month before slowing activities allowed availability to build, capping gains. Clean tanker market spot freight rates remained under pressure with strong declines west of Suez offsetting an improvement east of Suez. The return of refineries from maintenance reduced the need for interregional trade flows.
Global spot fixtures edged lower in August, down by around 0.16 mb/d or 1% m-o-m and around 1.37 mb/d or 7% lower than the same month a year ago. Indeed, global spot fixtures have broadly underperformed compared to the previous year, as the seasonal rise in activity was insufficient to offset exiting availability.
OPEC spot fixtures also remained below y-o-y levels. In August, OPEC spot fixtures averaged 13.90 mb/d, marginally lower than the previous month and about 0.27 mb/d or 2% lower y-o-y. Fixtures from the Middle East-to-West averaged 1.28 mb/d in August, representing a drop of 28% m-o-m and 36% y-o-y. The decline in crude flows to North America has been the one of the key contributors to this decrease, as burgeoning US crude supply dampened the need for inflows from outside the region. In contrast, fixtures on the Middle East-to-East route increased 0.62 mb/d or 8% in August to 8.21 mb/d. Annually, fixtures on the route were some 0.35 mb/d or 4% higher than last year’s levels. New refinery capacity in China and the return of Asian refineries from maintenance helped support the y-o-y and m-o-m increase. Outside of the Middle East fixtures averaged 4.41 mb/d in August, a decline of 0.22 mb/d or 4.7% from the previous month but an increase of 0.11 mb/d or 2% compared to the same month last year.
Sailings and arrivals
OPEC sailings rose 0.5% m-o-m in August to average 24.72 mb/d, but were down 0.2% y-o-y. Sailings from the Middle East increased 2.5% or 0.44 mb/d m-o-m and gained 1.2% or 0.22 mb/d compared to the same month last year. In monthly terms, crude arrivals in August declined in all regions except West Asia, but showed gains in annual terms in all regions except North America. Arrivals in the Far East declined 0.25 mb/d or 2.7% m-o-m but were 0.13 mb/d or 1.5% higher y-o-y. Arrivals in Europe declined by 0.06 mb/d or around 0.5% m-o-m, but were 0.20 mb/d or 1.7% higher y-o-y. Arrivals in North America declined by 0.06 mb/d or 0.6% m-o-m and fell by a stronger 0.73 mb/d or 6.9% y-o-y. Arrivals in West Asia were flat m-o-m in August at 4.47 mb/d. This partly reflects crude flows to India which have held rather stable so far this year.
Dirty tanker freight rates
Very large crude carriers (VLCCs)
VLCC spot freight rates rose in August with gains across all routes. Middle East-to-West saw an increase of 35% m-o-m to stand at WS27 points in August. Freight rates registered for tankers operating on the Middle East-to-East route rose 30% compared to the previous month, to stand at WS57 points in August. West Africa-to-East also showed gains in August, increasing 24% from a month ago, to average WS58 points.
Suezmax average spot freight rates fell further in August. The decline came from tankers operating on the West Africa-to-US Gulf Coast (USGC) route, which saw an 5% drop in spot freight rates to average WS57. This was sufficient to outweigh a gain in Northwest Europe-to-USGC rates, which recovered from the losses seen in the previous month, to stand at WS47 points
The Aframax sector declined further on most routes in August, with only the Caribbean-to-US East Coast managing to avoid a loss, remaining flat at WS75 points. Both the intra-Med and Med-to-Northwest Europe dropped by 13%. The Indonesia-to-East route slipped 5% to average WS88 points.
Clean tanker freight rates
Clean spot tanker freight rates showed diverging trends in August, with West of Suez losses overwhelming smaller gains East of Suez. Average spot freight rates West of Suez declined 28% on average as the return of refineries from maintenance left local product markets well supplied. The Mediterranean-to-Mediterranean led losses with a decline of 33% to WS103 points, followed by the Med-to-Northwest Europe route which came in a close second with a decline of 32% to WS111. Average rates on the Northwest Europe-to-US East Coast route fell 16% to WS99. To the East of Suez, clean tanker freight rates rose around 8% in August from the previous month to WS112, with the Middle East-to-East route increasing by 17% to average WS112 points and Singapore-toEast route slightly higher at WS131.
Petrochemical to Drive Future Tanker Demand (09/09)
When deciding for the type of tanker to invest for in the next 20 years, ship owners should take a closer look at future demand for various oil-based products, as things are bound to differentiate considerably, compared to today’s conditions. In its latest weekly report, shipbroker Gibson said that “the so called ‘War on Plastics’ has been steadily gaining traction over the past few years, with major companies such as McDonald’s and Carlsberg, to name a few, seeking to reduce the presence of single use plastics in their businesses. Governments are increasingly regulating plastics use, with the UK banning plastic straws from April 2020. Other initiatives will be rolled out in due course. Admittedly, however, the use of plastics is still projected to grow strongly over the coming years, largely driven by the emerging economies, where the desire for economic growth often outweighs environmental concerns. Given that demand for plastics is expected to make up an ever-increasing share of oil demand, understanding the drivers behind this demand will have ever increasing importance for tanker owners going forwards”, the shipbroker said.
Gibson noted that “the good news for the tanker market is that in the short term, petrochemical demand is growing strongly over the next five years. In fact, according to the IEA, 30% of demand growth between 2018 and 2024 will be driven by demand for plastics and petrochemicals. If more projects are announced in the short term, then the demand growth could be even stronger come 2024”.
According to the shipbroker, “beyond the next 5 years however, the forecast for growth is more uncertain. BP stated in its recent ‘World Energy Outlook’ that the ‘single-largest projected source of oil demand growth over the next 20 years is from the noncombusted use of liquid fuels in industry, particularly as a feedstock for petrochemicals, driven by the increasing production of plastics’, but, the oil major also notes that regulatory developments may threaten this growth. If new regulations are introduced to eradicate the use of single use plastics, then demand growth for petrochemicals could slow drastically. However, even with regulatory threats in the future, companies are stepping up investment in petrochemicals. Indeed, before worrying about slower demand growth for plastics, which may take more than 20 years to materialise, refiners and major industrial players are focusing on the greater threat from a slowdown in gasoline demand, which is likely to be squeezed by the rise of electric vehicles and more efficient engines. In the IEA’s most recent World Energy Outlook, under it’s ‘New Policies Scenario’ the Agency predicted that whilst there is increasing regulatory action around the use of single use plastics and higher recycling rates, oil use as a petrochemical feedstock would still grow by 5 million b/d by 2040. Even in the IEA’s ‘sustainable development scenario’, which assumes policy interventions to address climate change, the petrochemicals sector still registers demand growth, whereas demand for transportation fuels and other sectors declines. Industrial players appear to be aligning their long-term strategies to this view. Indeed, Reliance Industries recently announced its ambition to invest in Jamnagar to produce only jet fuel and petrochemicals in order to extract maximum value from every barrel. Saudi Aramco has also sought to expand its petrochemical operations through new projects, joint ventures and most notably, its pending acquisition of SABIC”.
Gibson concluded that “in short, the tanker market still has some way to go before it is likely to be impacted by the ‘War on Plastics’. However, at some point over the next 20 years demand for gasoline, and perhaps other liquid fuels is expected to slow. With petrochemicals taking a more important role driving future oil demand, shipowners will need to ensure their investment decisions align with the production strategies of the major industrial players”, the shipbroker concluded.
Brexit: The Impact on Tanker Trade (02/09)
Another potential factor of negative impact in the tanker market can come from the aftermath of a no-deal Brexit. In its latest weekly report, shipbroker Gibson said that “if Boris Johnson gets his way, the ever-impending event that is Brexit will soon be upon us. Little has been said about the impact on the wider international tanker market, with the UK being a relatively small piece of global tanker trade; however, Brexit will have an impact, most notably on regional trade between the UK and EU”.
According to Gibson “for 2019 to date, 57% of UK clean petroleum product (CPP) exports have gone to the EU, currently subject to zero tariffs. However, if the UK crashes out of the EU without a deal, British CPP exports to the EU would be subject to non-EU country tariffs of 4.7%. For imports, the UK may consider placing 0% tariffs on fuel imports; however, if it elects to do so for one country, under WTO rules it must do for imports of the same product from all countries. With tariffs being placed on product exports to its biggest market (the EU) and 0% imports likely on fuel imports, the UK refining industry would be placed at a competitive disadvantage, with this likely to impact trade flows. For example, Valero’s Pembrokeshire based refinery has exported just under a quarter of all its products so far this year to Ireland. With tariffs being introduced, it may be more competitive for Ireland to source these volumes from the EU. However, subject to the implementation of bilateral trade deals between the UK and other counterparties, it may prove more economical to push UK CPP exports further afield, for example to the US or West Africa. In effect these inefficiencies of supply could create increased tanker demand”.
“However, alternatively, a scenario may also evolve whereby the UK reduces both its exports and imports. Whilst currently much of the UK’s own product supply is retained, some areas, such as the Thames region tend to get most of their supply from the Belgium and the Netherlands. If tariffs are placed on UK exports, then it may prove more profitable to ship barrels coastally, rather than export. A leaked government document recently stated that the implications of a no-deal Brexit could force two UK refineries to shut down if tariffs were imposed because it would make them non-competitive compared to facilities within the EU. Although some refineries such as Total’s Lindsey refinery sell most of their product straight back into the UK. Analyst views are mixed; however, reduced trading flexibility would almost certainly impact margins, and potentially force refining runs lower”, Gibson said.
The shipbroker added that “between now and October 31st, there remains a great deal of uncertainty. Will there be a deal, or no deal? Without a deal, UK refineries will be impacted, to what degree is unknown. Tanker trade will be impacted. However, whilst it may be significant for smaller vessels trading regionally across North West Europe, the impact for the global tanker market will likely be muted”.
Meanwhile, in the crude tanker market this week, Gibson said that “a drip fed VLCC market has allowed rates to ease and allowed the established upward trend of last week to make a U-turn. Rates have taken a hit as the rate of fixing has slowed, allowing Charterers to achieve below last done numbers. Rates in the area have now adjusted to mid – low 60’s for East and high 20’s for West, with the list remaining healthy. For any gains, the market will need to see a higher concentration of cargoes next week. Suezmaxes were comparatively busy in the East this week, but a consistent supply of ballasters has kept rates more subdued than could have been. West rates have crept up to 140 x ws 35 with the East steady at 130 x mid 70’s. Little change is expected next week”, the shipbroker concluded.
Tanker Demand to Suffer Venezuelan Blow (27/08)
The tanker market is set for another blow emanating from the latest developments from the Venezuelan oil crisis. In its latest weekly report, shipbroker Gibson said that “in January 2019 the Trump administration announced tough sanctions against PDVSA, designed to halt US imports of Venezuelan crude. The US government also blocked access to its financial system for PDVSA transactions. Overall, sanctions have had the desired effect. Crude trade to US refineries came to a halt since February, down from approximately 0.5 million b/d in 2018. US also stopped exporting clean petroleum products (CPP)to Venezuela, most notably naphtha, used to dilute extra heavy grades to make synthetic crude for exports. Venezuela was largely unable to find a replacement for US clean products, with the volume of CPP imports into the country down by more than 50% compared to levels in 2018. Meanwhile, the economic and political situation in the country continued to deteriorate, while the mounting shortage of skilled personnel, financing and badly needed repairs/maintenance for oil installations translated into a further decline in the country’s crude production. The IEA estimates that Venezuela’s output declined between January and July by 470,000 b/d, down to 0.81 million b/d, its lowest level in decades”.
The shipbroker added that “despite the decline in absolute volumes, long haul crude shipments to Asia (mainly to China and India) have continued, being backed by debt to Chinese and Russian companies. In fact, long-haul trade has somewhat increased in recent months. Preliminary results from ClipperData show that the country’s crude exports to the East averaged around 675,000 b/d during the 1st half of 2019, up by nearly 100,000 b/d versus the same period last year. However, these volumes are still below the levels seen in 2016/17. It also appearsVenezuela has made some progress in adapting to challenges faced. In July Argus reported that PDVSA started the transition of its inactive heavy crude upgraders, used to produce synthetic crude mainly for US sales, into blending sites to maximise production of Merey blend, which is in demand for Asia buyers. AIS data supports this statement, with shipments of the grade up this year versus the historical trend. More recently, it has also been reported that PDVSA signed an agreement with a Chinese engineering company to repair Venezuela’s refineries. Venezuela will repay in oil products”.
Gibson also noted that “taking into account these developments, it is perhaps not surprising to see fresh US sanctions, with the Trump administration freezing all Venezuelan government assets in the US. The latest sanctions do not explicitly sanction nonUS companies that do business with the US; however, the order threatens to freeze US assets of any entity determined to have “materially assisted” the Venezuelan government. Most likely, it is up to the US authorities to decide what “material assistance” actually means and so the willingness to sanction directly Russian and Chinese companies is yet to be tested”.
The shipbroker concluded that “all in all, the position of the Maduro government appears increasingly uncertain, with the latest sanctions only adding to a long list of problems faced. Reuters has already reported that China National Petroleum Corp (CNPC) has halted August loadings from Venezuela, as the company worries that it could be hit by secondary US sanctions. Potentially, Venezuela’s crude output could decline further and with it, long haul trade to the East. On its own, this undoubtedly is a negative development for tanker demand; however, with rising output out of the US, Brazil and robust prospects out of neighbouring Guyana, this will simply slow but not stop the growth in long haul trade from the Americas to the East”.
Tanker Owners Could Have a New Market Soon (12/08)
The market for ship tankers could soon welcome a new member in Guyana. In its latest weekly report, shipbroker Gibson said that “there may be few new frontiers left in the oil market, with most regions having been tested, even if deemed to be uneconomical in the current oil era. However, from next year there will be a new kid on the block – Guyana. Throughout history, Guyana has hardly made it onto the tanker map. Despite sharing a boarder with Venezuela to the north and Brazil to the south, the country has never produced oil on a commercial scale. Even from a demand perspective, the country imports only minimal volumes of refined products and has no domestic refining capacity”.
“However, Guyana is now gaining international focus as exploration and production (E&P) activity ramps up. Major companies have joined the E&P efforts in the country, including ExxonMobil, HESS, CNOOC, Tullow, Repsol, Total and Qatar Petroleum, among others. By the end of 2020, oil production capacity is expected to reach 120,000 b/d as the Liza Phase 1 field starts up. Currently the FPSO Liza Destiny is en route to Guyana from Singapore and due to arrive on site later this month. Liza crude will load directly from the Liza Destiny FPSO and will be relatively light and sweet with an API of 32.1 and sulphur content of 0.51%. This FPSO will be followed by another two firm units, when the Liza Phase 2 field (220,000 b/d) and Liza Phase 3 (180,000 b/d) are due to come online in 2022 and 2023 respectively. Another two FPSOs could follow, taking production up to 750,000 b/d by 2025, subject to the final investment decision (FID) being sanctioned”, Gibson noted.
According to the shipbroker, “with a population of just 780,000, the country’s oil production is likely to prove transformative for the country. In 2018 the country’s GDP was estimated at $3.6 billion according to the World Bank, with its stake in the various fields worth potentially $13-15 billion in revenue by 2025. However, it may not all be plain sailing for the country. Given its proximity to Venezuela, Maduro’s regime has launched several bids to claim sovereignty over some of the oil fields and even sent its navy to harass E&P activity, albeit with limited success. The country is also preparing for elections following a vote of no confidence against the incumbent government, whilst many have called for a review of oil contracts after suggestions that the country sold off its oil too cheaply. E&P companies may therefore hold off on another further FID until the political environment becomes clearer”.
Gibson added that “nevertheless, barring any unanticipated delays, tanker owners can expect a new load area to open up from 2020. Whilst the volumes will be small at first, they will gradually increase up to 2025 and perhaps beyond. More importantly, although production of 750,000 b/d still puts the nation well down the list of top oil producing countries, the lack of domestic refining capacity and local demand means that exports wise, the country will make it into the top 20 crude oil exporting countries”.
Meanwhile, in the crude tanker market this week, Gibson said that in the Middle East, “VLCCs maintained a brisk early pace that complemented solid Atlantic interest and allowed owners to score new highs that hadn’t been revisited since the Spring. The August programme is entering it’s final phase however, and widespread holidays in the East from late this week will both combine to create a drag anchor to any material further gain over the short term, at least. Currently rates operate at up to ws 55 to the Far East for modern units with runs to the West marked in the mid ws 20s via Cape. Suezmaxes showed little rate variance over a rather flat footed week – 130,000 at around ws 75 to the East and to ws 32.5 to the West currently, and little change forecast though early next week either. Aframaxes kept to a slow bell through the week and just about hung on to an average 80,000 by ws 100 to Singapore with another testing phase to come”.
Tanker Charters a Very Complex Affair (09/08)
On the back of the past couple of months’ turmoil in the Gulf Arab region, fixing a tanker on a charter basis is no easy task. In its latest weekly report, shipbroker Intermodal commented that “on the 12th of May four tankers were attacked near the coast of Fujairah. The tankers hit were waiving international flags such as that of Norway. A month later a second attack took place, involving 2 tankers passing near the straits of Hormuz. The above incidents were followed by the detention of an Iranian VLCC in Gibraltar by the British Royal Marines, the “Grace 1”, which was carrying crude oil to be discharged in Banyas, Syria. It should be noted that the discharging of crude oil cargo in Syria is a breach of EU Sanctions. Following this, British ships were threatened when passing the Straits of Hormuz /Gulf of Oman, thus resulting in many tankers which were supposed to load inside Arabian/Persian Gulf, not proceeding with loading/discharging ops. In other instances, British naval ships have been escorting ships, as happened with BP’s ship the MT British Heritage & the MT Pacific Voyager. To date the situation in the area remains volatile, while Iran’s official position is that there is no involvement from their side in any of the attacks whatsoever. Meanwhile the market remains under pressure without any signs of significant improvement”.
According to Intermodal’s, Dimitris Kourtesis, Tanker Chartering Broker, “throughout the above-mentioned period the Joint War Committee listed the Persian Gulf and Gulf of Oman as high-risk areas, and concurrently war risk premiums for ships trading in the area have rocketed. The present situation should have owners with ships trading in the area, double checking their contractual rights and protective clauses in their time charter parties”.
Kourtesis added that “during the negotiations of fixtures, Owners/Charterers negotiate and mutually agree the trading areas, though if the specific area has not been excluded then it’s something that needs to be renegotiated/reviewed on a case by case basis. War Risk clauses depending on how they are drafted, may offer protection to owners, by giving the option of terminating the TC/P in the event of a war risk i.e. Shelltime 4, 1984, or enabling the master to refuse charterers orders and timely request new voyage orders”.
Intermodal’s broker added that “another important point to stress is the “Safe/Unsafe Port” situation. If the TC/P lacks a clause targeting directly to the situation of safe/unsafe port or berth, then it’s solely down to Owners/Masters’ discretion. Below there is a good example of how this situation can be complicated, and therefore needs to be assessed on a case by case basis according to the UK Defense club”.
“The Saga Cob  2 Lloyd’s Rep. 545, there had been an attack on a ship at an Eritrean port within the previous three months and there had also been other attacks, yet the port was deemed not unsafe and the charterers were not in breach of the safe port warranty by ordering the ship there. By contrast, in The Chemical Venture  1 Lloyd’s Rep. 508, there had been three attacks on ships in the previous eleven days at a single port. The court held that the port was unsafe and that it was negligent for charterers to send a ship there. To put it briefly, the present situation is not straightforward, before Owners/Charterers order a ship to enter a high war risk area/port/berth they have to timely asses their already agreed contractual agreement, and discuss with their clubs and legal associates before taking any decisions, on how to treat the situation. A cautious and patient approach could prevent claims/disputes with the contractual parties of the TC/P in the near future”, Kourtesis concluded.
Ship Owner Optimistic About Tanker Market Recovery (06/08)
With the first half of 2019 plagued by increased net tanker fleet growth and a higher than expected refinery maintenance, things weren’t going to be all that rosy for tanker owners. However, ship owner Teekay Tanker remains optimistic on the future. The ship owner said in a recent analysis that “crude tanker spot rates declined during the second quarter of 2019 compared to the first quarter of 2019 primarily due to seasonal factors, as well as some near-term headwinds which have continued into the beginning of the third quarter. Lower OPEC oil production has impacted crude tanker demand during the first half of 2019, with OPEC crude oil production down by around 2.5 million barrels per day (mb/d) since November 2018. This reduction is due to both over-compliance with the 1.2 mb/d of supply cuts announced in early-2019 and reduced volumes from Iran and Venezuela due to U.S. sanctions. In addition, the elimination of Venezuelan oil shipments to the U.S. has resulted in a reduction in shipping activity in the U.S. Gulf / Caribbean Aframax market. Furthermore, at its most recent meeting, OPEC decided to extend production cuts through to March 2020 in an effort to reduce global oil inventories and support oil prices”, says Teekay Tanker.
The shipowner added that “tanker rates have also been impacted by heavier than normal refinery maintenance in the first half of the year as refiners prepare for the upcoming IMO 2020 regulations. According to the IEA, global refining throughput fell by 0.7 mb/d year-on-year in the second quarter of 2019, the largest annual decline in 10 years. This led to reduced crude tanker demand, which has carried over into the early part of the third quarter. Finally, the first half of 2019 saw relatively high tanker fleet growth of 20.5 million deadweight tonnes (mdwt), or 3.5 percent, which was the highest level of fleet growth in a six-month period since the first half of 2011. This high fleet growth was a result of a heavy newbuilding delivery schedule since the start of the year and a lack of tanker scrapping, with just 2.7 mdwt of vessels removed in the first half of the year compared to 21.5 mdwt for the full year of 2018”.
“Despite some near-term headwinds, the tanker market fundamentals continue to support a market recovery in the latter part of the year and into 2020. First, refinery throughput is expected to increase significantly in the coming months as refiners ramp up activity in order to produce sufficient low sulphur fuels ahead of the impending IMO 2020 regulations. According to the IEA, global refinery throughput is estimated to increase by over 3 mb/d in the third quarter of 2019 compared to the second quarter, which is expected to be positive for crude tanker demand. The new IMO 2020 regulations could create additional volatility for the tanker market through new trade patterns and arbitrage movements, floating storage demand, and a potential increase in port congestion as the market adjusts to the change”, Teekay Tanker noted.
It added that “the second half of the year is also expected to see an increase in U.S. crude oil exports as new pipeline infrastructure is brought online that will allow more Permian Basin shale oil to reach the U.S. Gulf coast. U.S. crude oil exports have averaged 2.8 mb/d in 2019 to date, up from 2.0 mb/d last year. However, further increases are being hampered by a lack of pipeline capacity to the Gulf coast. This is expected to be alleviated in the coming months when three large pipelines with a combined capacity of around 2 mb/d are planned to come online, allowing U.S. crude exports to increase significantly. This is expected to be positive for mid-size tanker demand due to both direct exports to Europe on Aframax and Suezmax tankers, and increased Aframax lightering demand for transportation on Very Large Crude Carriers (VLCCs) to Asia”.
“Finally, the tanker fleet is set for a period of much lower fleet growth over the next two years due to a relatively small orderbook. The tanker orderbook currently totals 53 mdwt, or 8.7 percent of the existing fleet size, which is the lowest tanker fleet-to-orderbook ratio since early-1997. Fleet growth could be further offset by an increase in vessel off-hire time in the coming months as ships are taken out of service for scrubber retrofitting in anticipation of IMO 2020 regulations. As a result, lower fleet growth levels are expected in the second half of the year, with continued low fleet growth during 2020. In summary, the tanker market is currently at a seasonal low point, which is compounded by some near-term factors. However, the fundamentals continue to point towards a stronger tanker market during the latter part of 2019 and into 2020 due to a tighter tanker supply / demand balance”, Teekay Tanker concluded.