Crude oil tankers up sharply – paving the way for product tankers next
These are dramatic days. At the time of writing, intense Brexit discussions are in progress in the UK. In the US, President Trump is in danger of impeachment. The protests continue in Hong Kong, and the US and North Korea are expected to meet for new summits shortly. These are eventful days by any reckoning, with much of the debate centring on increased tensions in the world, a new geopolitical situation – and an impending slowdown in economic activity that is expected.
Increasing demand for oil
The increased concern at macro level has also spread to the oil market, where the price of oil has dipped from just over USD 70 per barrel last spring to today’s price of under USD 60 per barrel. At the same time, there has been a slight downward adjustment of projected growth in demand.
However, it should be pointed out here that global demand for oil is good and continues to increase, albeit at a slightly lower rate than in previous forecasts. Total demand for oil is expected to increase by 1.2-1.4 million barrels per day by 2020 – compared with previous forecasts of about 1.6 million barrels.
Production not meeting demand – stocks declining
In parallel with continuing strong demand, the OPEC+ production cuts remain. Although the US and a number of other countries have increased their production, this does not fully offset the OPEC+ cuts and increased demand. The additional demand is covered instead by stock withdrawals in the consuming countries. Withdrawals have been in progress for a long time and the stock levels are now below the average for the last five years. We have said it before and we will say it again: this course is not sustainable in the long term. A continuing reduction in output would create a risk of OECD oil stocks falling below about 55 days of consumption – which is neither desirable nor sustainable.
Strong development for the crude oil tanker segment
So, how is the situation for tanker shipping? We can confirm that the market has turned out largely as we previously communicated – but with a time lag of about one quarter. In the largest tanker segment, VLCC, the market has turned. Since summer, rates have started to move upwards. The drivers include underlying strong demand for oil, extensive US exports and declining net tanker fleet growth. In parallel, the installation of scrubbers on a relatively large number of vessels has also reduced the total available fleet, which has further contributed to the rising rates.
In addition to these more or less structural causes, the tense geopolitical situation has also contributed to the stronger market. Attacks on two production facilities in Saudi Arabia in mid-September resulted in VLCC rates rising from about USD 25,000 per day to USD 40,000. Since then, the US’s imposition of sanctions on entities of the large Chinese shipping group Cosco, which operates more than 100 tankers, has contributed to the rates rising further. At the time of writing, they are at approximately USD 70,000 per day – the highest level since 2015. Developments in recent weeks clearly show what major effects individual events can have in a tight market. The volatility continues, but at a significantly higher level than previously.
MR next in line
According to the textbook, the smaller crude oil tanker size classes, Suezmax and Aframax, have followed suit. This means that all crude oil tank segments are now in a positive trend. The impetus has not yet reached the MR segment – but we are convinced that it will. Within a few weeks, crude oil will have been converted into refined oil products, which need to be shipped. We are already seeing a significant increase in activity, which is highly likely to bring stronger rates as we enter autumn and winter.
In addition, there are a large number of other factors that favour the market:
- Seasonality. We are facing a seasonal upturn, as demand for oil and oil products normally increases during winter.
- The stock situation. Stocks have been declining for a long time and now need to be replenished to avoid falling below critical levels.
- Consequences of IMO 2020. Approximately 350 tankers will be taken out of service during November/January to install scrubbers. This will greatly reduce the available supply of vessels.
- Limited growth in the fleet. The weak market in recent years has resulted in a significant phasing-out of tankers and with the small number of new orders, the tanker fleet is only expected to grow by about two percent in the next two years.
The upturn has started, as already mentioned. It is now time to ensure delivery of results in the improved market. We look forward to doing so.
CEO, Concordia Maritime