VLCC freight rates settled down to around USD 45,000 per day in the second half of May but continue at sustainable levels that have been the norm in that market
VLCC freight rates settled down to around USD 45,000 per day in the second half of May but continue at sustainable levels that have been the norm in that market since it took off for the winter season in beginning of December. Current strength in the crude sectors is also due to further deployment of carriers into floating storage whilst an oversupply of smaller vessels carry on to tempered gains for product charters.
CRUDE - Iran ramped up production in April to 3.75 mb/d, but the extra output appears destined to end up in storage at sea. Weaker demand for heavier crudes, unattractive price formulas and the threat of new sanctions have combined to reduce buying interest in the country’s heavier, sour crudes. Estimates for the volume of unsold Iranian crude held in floating storage vary but generally ranged between 30-38 mb by early May on reported 18 VLCC’s and one Suezmax, about double that of end-March levels.
Total short-term crude floating storage levels continued to rise to 81 mb in April, from 65 mb in March. Most of the increase resulted from additions of Iranian crude oil to floating storage in the Middle East Gulf.
The trend for more oil to be stored on larger carriers is highlighted by a net decrease in the number of vessels being deployed for storage from 100 to 92. The total number of VLCCs deployed for storage now stands at 44, a month-on-month increase of 4. In the coming months, it is conceivable that crude floating storage could increase further if a widening price contango encourages arbitrage front month buying.
At end-May, US President Obama announced a six-month moratorium on offshore drilling, postponing the plans for new drilling projects as well as halting current drilling projects in water depths of 500 feet or more. While current estimates of lost production for 2011 range from 160,000-240,000 bpd (with the impact potentially greater depending on the actual duration of the moratorium as well as the progression of the existing leak), any amount of lost US domestic production is likely to be positive for crude oil tanker demand as the lost domestic production will likely be supplemented by long-haul OPEC production increases.
PRODUCT - Draws in Mediterranean and Northwest European short-term product floating storage pushed the overall product levels further down from 52 mb at end-March to 40 mb at end-April. Product floating storage fell by 12.3 mb across all regions, with decreases concentrated in Northwest Europe (-4.6 mb) and the Mediterranean (-3.3 mb).
As forecast in the BIMCO analysis on the product tanker market, MR and Handysize product tanker freight rates have come down from the winter highs to depressed levels at USD 8,193 per day for a Handysize and USD 6,072 per day for a MR. The two segments are likely to remain under pressure from the fundamental supply and demand balance, before the next winter market could bring around more healthy earnings.
The active fleet has grown by 2.0% during first five months of 2010, caused by deliveries of 18.8 million DWT offset by tonnage removed for conversions amounting to 2.9 million DWT and 6.9 million DWT being demolished. The scrapping/conversion level has developed better than expected with 9.8 million DWT exiting the tanker fleet. Lower rates for single skin tankers may be one of the reasons behind this. The current level of tankers leaving the fleet indicates a full-year total of 27 million DWT potentially out of the waters in 7 months time. Should this materialize, it would be considerable higher than the BIMCO estimate and result in stronger than anticipated counterbalance to the number of deliveries.
BIMCO forecast inflow of new tonnage (+10,000 DWT) in 2010 to reach 42 million DWT offset by conversions, phase-outs and “normal” age-scrapping of 20 million DWT. This could make the fleet grow by 5% in 2010. Meanwhile, expected deliveries in 2011 are forecasted to hit a new all-time high of 50 million DWT that would make the fleet grow by 9%. It seems as if 2010 is on course to provide some kind of brief relief for tanker fleet growth to prepare for a difficult year in 2011.
Oversupply of crude tonnage is expected to weigh heavily on rates for the foreseeable future. However, in the short term, support could come from three factors. Firstly, increasing Somali pirate activity, which has forced many operators to divert cargoes away from the East African Coast and in some cases to re-route around the Cape of Good Hope, increasing shipping times to Europe by 12 days. Secondly, although as yet, the recent oil spill in the Gulf of Mexico has not had an impact on the tanker market, if the spill was to encroach on shipping routes it would likely impede shipping to and from the US Gulf Coast. Finally, the renewed rise in the use of large crude carriers for floating storage could limit their availability, especially on routes from the Middle East Gulf.
Freight rates for crude carriers are forecast by MSI to stay firm over the next 6 months where VLCC and Suezmax are forecast to see rates around USD 30,000-40,000 per day, with Aframax coming down from recent spike and firm around USD 15,000-20,000 per day. Product tanker rates are foreseen to see rates increase fairly well from levels below USD 10,000 per day to some USD 13,000 per day during next 6 months of 2010.
Increased oil supply and decreased consumption have radically altered the outlook for US imports. Five years ago the EIA forecast that by 2025 America would be importing 16 million barrels of oil a day, equal to 68% of its needs. Now that forecast has come down to less than 9 mb/day. Disappointingly, the total bill will still be higher because prices have gone up so much. Approx. 80% of US oil imports arrive by sea.
The Deepwater Horizon drilling accident in the US Gulf has led to a major crude spill. Regional production is so far unaffected but the incident may lead to tighter safety measures and delay further offshore leasing.
The catastrophic explosion at the Deepwater Horizon rig in the Gulf of Mexico has had a minimal impact on actual production in the region so far but there could be far-reaching implications. Operational safety and regulatory issues have raised the spectre of significantly higher development costs, a possible curbing of offshore leasing and slower growth in offshore production. Combined, these critical issues could lead to a strengthening of the long-term forward oil price curve.
BIMCO has concerns that the industry may potentially be hit by unlimited liability in relation to removal costs originating from oil spills, should OPA 90 be changed in this dramatic direction.