Crude oil has been trading in the USD 70-90 per barrel band for almost a year now. Oil prices crossed the USD 90 per barrel threshold in May
Crude oil has been trading in the USD 70-90 per barrel band for almost a year now. Oil prices crossed the USD 90 per barrel threshold in May only to slip straight down below USD 70 per barrel. Now oil prices have been touching the USD 90 per barrel mark again – on what seems to be an upward trend. Stronger-than-expected demand from Europe during Q2 and Q3 combined with the already strong demand from China and the expectation of a continued growth in global oil consumptions contributed to the recent increases in oil prices. Going into 2011 expectations are that demand will grow by 1.3-1.4 million (2.5%) barrels per day (m/b per day), this is down from the 2010-rebound growth that is estimated to be around 2.1 m/b per day (1.4%).
While world oil supplies have risen significantly this year, stronger than expected demand growth has generated downward pressure on inventories, especially in regions outside the US. As an added symptom of a tighter market, numerous reports indicate that floating oil storage is significantly lower than year-ago levels, diminishing a secondary source of supply to the market that was available on short notice.
A lower level of floating storage also means that more vessels are becoming available for hire in the spot market. This has impacted VLCC rates severely. Owners have been punished hard for having vessels on the Arabian Gulf (AG) tonnage list. Demand was far from strong enough to counterbalance the overhang. Rates on TD3 (AG-Japan) came off sharply in early July and have just recently started to improve. Following a sudden jump – rates appear to be settling at USD 20,000-25,000 per day.
In the smaller crude oil segment, Aframax earnings have following suit following some healthy spike in the first half of the year, rates have been hovering around the USD 15,000 per day.
The MR tanker market has remained depressed due to the renewed weakness in US gasoline imports, which over the past couple of months have averaged 0.84 m/b per day, the lowest level for this time of year since 2003 and slightly below last year’s level. Not only is the demand situation challenging, the supply also seems to trouble owners and operators as rising MR supply limits the upside potential to freight rate considerably. Abundant MR capacity in the Atlantic basin has made the recently opened gasoline arbitrage trade less beneficial than it normally is. Rates were doubled up week-on-week, but the starting point was USD 6,000 per day – so the higher demand only limited the pain slightly. This year’s “first” Winter market in January provided MR freight rates just above USD 12,000 per day clearly better than the present rates and a far cry from the 2006 Winter market peak of USD 45,000 per day.
However, despite these disappointing results on the front haul gasoline trade into the US, there are some strong gains in US product exports, in particular distillates. Distillate exports increased from just over 0.1 m/b per day in 2004 to 0.59 m/b per day in 2009, with volumes for the first eight months of this year being fairly close to last year’s shipments at 0.6 m/b per day.
While US gasoline imports are low, the demand remains higher than last year and on course for significantly higher Winter demand than last year. The low level of imports has made the US eat into their inventories, bringing US gasoline stocks into average range for this time of year.
Ending a 2½ month slide in freight rates, touching USD 1,973 per day on 3 November, LR1 tankers of 75,000 DWT trading from AG to Japan have enjoyed an optimistic November, quoting rates as “high” as USD 15,820 on 26 November.
A couple of LR2s were fixed for storage in the West at low rates. This reduced the surplus of large clean tankers in the Arabian Gulf, but hardly enough to change the gloomy outlook for ships loading in this area during the next month or so.
The active tanker fleet has grown by 3.9% so far in 2010, caused by delivery of 38 million DWT offset by 12 million DWT being demolished while another 9 million DWT has been removed for conversion etc.
Total tanker fleet growth in 2010 has benefitted largely from the demolition of elderly ships. With an average age of 27, the demolished vessels are the youngest in many years. The scrapping ages of tankers range from 16 to 67. Clarksons data suggest that almost 20 million DWT has been phased-out this year. In combination with above average scrapping level, fleet growth has thus been considerably limited.
The number of ships and deadweight tonnage in the orderbook has dropped during the last two months, indicating that new orders are placed at a slower pace than new ships are being delivered.
On the contracting side just 29.7 million DWT has been contracted in 2010. Even though this is double-up from 2009, it is the lowest contracting level since 2002.
Both dirty and clean tanker markets have basically played out as forecasted in the latest edition of SMO&O. Thus BIMCO continues down that road and suggests that the Winter season could provide a breathing space for the tanker markets. Don’t expect rates to go through the roof as we are not in for really enjoyable spikes, but growing demand and lower stocks provide for some optimism, mostly in the product tanker segment. Freight rates for product tankers of all sizes are not expected to break the USD 20,000 per day mark during the Winter market.
Once we have achieved a “strong, balanced, and sustained world recovery”, the tanker markets will look much better. Even though China has gained importance in terms of tanker demand, the US economy needs to get back on its feet before tanker demand can take off.
The tanker industry faces a large number of vessel deliveries in 2011 and 2012. However, the actual deliveries in 2009 and so far in 2010 have been significantly lower than originally scheduled and this development of orders being postponed is likely to continue. This, in part, has reduced the overhang of excess tonnage which would have been enormous had the vessels been delivered according to the original schedule.