Demand: EIA has revised their oil demand forecast upwards for 2011. Global oil demand in 2011 is now expected to rise by 1.3 million barrels per day (MB/day) to 87.8 MB/day assuming consensus trends in the global economy, crude prices development and possible efficiency gains. Growth will be driven entirely by non-OECD countries (+3.8% or +1.6 MB/day), while the OECD sees resumed decline (-0.5% or -0.2 MB/day). The outlook for 2010 remains unchanged at 86.5 MB/day (+2.1% or +1.8 MB/day versus 2009).
EIA has revised their oil demand forecast upwards for 2011. Global oil demand in 2011 is now expected to rise by 1.3 million barrels per day (MB/day) to 87.8 MB/day assuming consensus trends in the global economy, crude prices development and possible efficiency gains. Growth will be driven entirely by non-OECD countries (+3.8% or +1.6 MB/day), while the OECD sees resumed decline (-0.5% or -0.2 MB/day). The outlook for 2010 remains unchanged at 86.5 MB/day (+2.1% or +1.8 MB/day versus 2009).
The drivers are, not surprisingly, going to be China and India. While the latter is expected to be a stronger driver in the future, China is already impacting the crude oil tanker market extensively.
CRUDE - China remains the powerful charterer of VLCC spot fixtures out of the Arabian Gulf. In the month of July, 48% of VLCC spot fixtures out of the Arabian Gulf were intended for discharge in China, according to Braemar Seascope.
TD3 from Ras Tanura (Arabian Gulf) to Chiba (Japan) has experienced some ongoing summer lull since rates went south of USD 40,000 per day at the beginning of July to leave average July earnings at USD 26,519. This was a hard landing considering the H1-2010 average earnings of USD 61,442 per day. Rates ended July by dipping their toes in sub-20,000 territory for the first time since September 2009. It seems as if volumes are not to blame for this – it is merely too many ships being at the wrong place at the same time. This gives reason to believe the dip is temporary in nature and should not remain that low.
TD3 is normally a near-perfect surrogate for modern VLCC earnings but during H1-2010 TD3-earnings have been 11% higher than average modern VLCC-earnings. Influential to this is the increasing oil thirst in China which is heavily biased in favour of crude oil as the country currently invests heavily in refinery capacity. Refinery capacity could reach 10 million bpd already this year. In July the correlation was back in place with TD3 and average modern rates just 1.6% apart.
In 2009, 48% of Chinese crude oil imports originated from the Middle East, while 29% was shipped out of Africa. In 2010 China is expected to consume 8.9 MB/day of oil, which is an increase of 9.5% as compared to 2009.
PRODUCT – The trans-Atlantic gasoline arbitrage reopened at the end of June, resulting in a massive freight rate improvement on top of already climbing rates. Nigeria also re-entered the market as an additional buyer of Europe’s excess gasoline. However, the level is still somewhat below the healthy days a few years ago when the average cross-Atlantic was around USD 28,000 per day. Nowadays, the spikes we talk about are just above USD 20,000 per day, and already back at 15,000. After a few years of little “US driving season” effect, the lack of it has become the new norm.
The Atlantic hurricane season which runs from 1 June until 30 November is forecast by Colorado State University and NOAA to be very active. Hurricane Bonnie was the latest storm of the season to disrupt US Gulf oil output. While by the end of June Hurricane Alex forced a halt to offloading operations at the Louisiana Offshore Oil Port (LOOP), Bonnie prompted oil and natural gas producers to evacuate many offshore workers, shutting in more than half of crude oil production in US-regulated areas of the Gulf and about 25% of gas output. However, the impact on tanker shipping and freight rates was small. Hurricanes Katrina and Rita had a great impact on tanker rates back in 2005 when they were haunting the US Gulf and coastal regions as well as causing outages in oil production.
Next in line is tropical storm Colin which, at the time of writing, is heading for Bermuda and then northwards, but not expected to interrupt the tanker markets.
Large draws on short-term floating oil storage in Northwest Europe, the US Gulf Coast and to certain extend also Asia-Pacific, resulted in fewer vessels being preoccupied with this kind of employment. Meanwhile, the building of floating product storage off the West African coast line meant less of a decline on the overall level. Compared to a year ago, the underlying trend is that of more oil being stored on the largest vessels.
Crude oil held in floating storage decreased 9% to 85 MB by end-June from 93 MB in May, but storage remains significantly up from 65 MB in March. Floating product storage declined by 12% to 30 MB, considerably down from 52 MB by end-March.
New orders for tankers are beginning to push deliveries in 2012 and 2013 significantly upward. Since last SMO&O two months ago, tankers scheduled for delivery in 2012 and 2013 have gone up by 5.8 and 3.8 million DWT respectively.
The active fleet (+10,000 DWT) has grown by 3.0% since the turn of the year, caused by deliveries of 26.1 million DWT offset by tonnage removed for conversions/scrapping amounting to 11.4 million DWT. Last year a total of 19.5 million DWT was converted/demolished; this year is on course for the same level of exits from the tanker fleet. The current level of tankers leaving the fleet is expected to dampen in coming years as 2010 is inflated by the IMO phase-out. Together with slightly higher deliveries in 2011 as compared with 2010 – the fleet growth in 2011 is projected to be 8.1%.
The fleet of non-double hulled tankers has shrunk by 3.1 million DWT over the last 2 months, bringing that fleet down to 43.3 DWT by the end of July.
BIMCO forecasts the inflow of new tonnage (+10,000 DWT) in 2010 to reach 43 million DWT, offset by the demolition of 18 million DWT. This could make the net fleet grow by 5.8% in 2010. The fleet could grow at a slower pace if more tonnage was sent to the breakers. For example, if another 10 million DWT is demolished on top of the projected 18 million, the fleet would then grow by only 3.5%.
The forward curve for TD3 remains in contango as Q4-2011 is trading around USD 39,000 per day with the spot rate around USD 20,000 per day. The paper market expects the current spot freight rate level to be the bottom, with rates climbing slowly to USD 25,000 per day in Q3-2011 and USD 38,000 per day in Q4-2010.
The new US sanctions enacted on 1 July explicitly targeted “petroleum and natural gas resources” in a move that also focused sharply on the transportation chain. Sanctions specialists at US law firm Vinson & Elkins summed up the bottom line of this by saying, that “because the sanctions that may be imposed on prohibited conduct are severe, foreign entities may be forced to decide between doing business with the US and doing business with Iran.” BIMCO has already developed special clauses to protect owners from any potential breach of contract arising from a refusal to perform employment which may involve a violation of any sanctions.
Neither the UN nor the US sanctions have so far made any significant impact on the crude oil tanker markets. Oil product imports however have completely stopped. Note that only the US has put a general trading ban on Iran (including oil trading), but since the US does not import oil from Iran, that has no effect. Note that the UN sanctions do not prohibit import of oil from Iran. Think of it this way – Iran is the world second largest exporter of oil, if that were to come to a full stop, the oil price would go sky high – and that has not happened. Sourcing your oil from other destinations would, however, add more ton-miles – but not that many as the natural substitutes would be the neighbouring nations in the Arabian Gulf.