Tanker Shipping - Global decline in oil demand and oversupply creates challenging start of 2012

Overview

Overall oil demand declined by 0.3 million barrels per day y-o-y in Q4-2011 as the global economy weakened and the winter season did not provide low enough temperatures to stimulate demand. As we have just left 2011 behind us, the final estimates for demand growth stay preliminary for the time being at 3% for product tankers

Demand:
Overall oil demand declined by 0.3 million barrels per day y-o-y in Q4-2011 as the global economy weakened and the winter season did not provide low enough temperatures to stimulate demand. As we have just left 2011 behind us, the final estimates for demand growth stay preliminary for the time being at 3% for product tankers driven by North American imports and Intra-Asian markets. Preliminary demand growth figures for crude oil tankers are close to 2% in 2011 (due to longer distance etc.), with the VLCC segment taking the lion’s share of that growth figure whereas Suezmaxes saw a decline in demand and Aframax crude tankers being more or less flat.

The VLCC demand growth defied a slower crude oil import from the world’s second largest importer Japan, as they recorded a 22-year low import level at just 3.6 million barrels per day. Japanese imports peaked in the mid-1990’s and have been on a declining trend since. The global financial crisis in 2009 and the triple disaster last year have only made the declining trend steeper.

The winter markets normally represent a time for encouragement in the tanker shipping business, but so far the freight rate volatility has been provided from elsewhere.

CRUDE
Vessel values for tankers have been under escalating pressure during the past six months. The recent jump in freight rates has only done little to change that image. Much of the focus has been on balance sheet valuations as we get close to the season of annual accounts. But even more interest has centred on the demolition values of 15 year old VLCCs. As the industry is searching for ways to ease the glut of VLCCs, the current balancing point is around vessels that are 15 years old. During the last four months of 2011, the highest value could be obtained by breaking up the vessel at an USD/Ldt price around 500-520. But during January the pendulum has swung back in favour of continuous trading, mainly due to sliding demolition prices.

CLEAN
Since mid-November where earning left the single thousands and turned double-digit for Handysize tankers, they haven’t looked back. Strong Atlantic markets on TC2 from Europe to the US and TC3 from the North coast South America to the US have been valuable for many owners and operators in the Handysize segment during the past weeks. Starting at USD 7,500 per day by early November, rates went as high as USD 23,000 per day. The larger product tankers are in a quite different situation, as LR1 and LR2 are starting 2012 at rates that are horrendous by any yardstick. They are currently struggling to make earnings stay in positive territories with LR1 and LR2 making USD 3,000-4,000 per day up from USD 500 per day just the week before.

By looking at time charter fixtures for MR tonnage, it’s clear that TC rates cannot go any lower – without the owner losing money every day. It has been like that for a couple of years now and gives a solid indication of where long-term break-even levels are on similar vessels. Tonnage providers are especially under pressure, as deals are done at levels where the earnings only come from the attached profit sharing agreement.

A vessel purchased in Q2-2010 at USD 34.5 million for delivery now, financed by 5% capital costs with limited repayments on debt and industry standard OPEX levels, must make USD 13,700 per day to cover expenses. This is basically the market rate today and illustrates the dire situation we are still facing. Brand new MR tonnage cannot be hired any cheaper than this.

Supply:
The total crude tanker fleet grew by 6.2% in 2011, as 33 million DWT of new vessels was launched. This was significantly up from 2010. Vessels being demolished or removed from active trading accounted for 11.3 million DWT. The total product tanker fleet grew by 4.6%, continuing the slowing trend from 2010 where the fleet grew by 4.8%.

So far in 2012, deliveries have been very heavy on the crude oil tanker side. Nine VLCC’s have already been launched, while only a couple of product tankers have entered the market. In total, this brings the crude oil tanker fleet up by 0.7% year to date – while the product tanker fleet is up by just 0.1%

The trend is clearly in line with what is in the pipeline for 2012, as 73% of the orderbook is crude oil tankers, of which more than half will be delivered into the VLCCs segment. In total, BIMCO expects that the crude tanker supply side will grow by 6% in 2012 and the product tanker supply side will grow by little more than 3%.

BIMCO has estimated the VLCC demolition potential to amount to 5.9% of the current double-hulled fleet. Little more than 10 million DWT (36 tankers) are commercially overmatched as they can only carry cargo up to 292,000 DWT and are on average 15 years of age. Furthermore, factors such as costs related to the third special survey and the composition of your entire fleet as such, are very relevant to consider also.

The hardship of the commercial side is mirrored in the appetite for placing new orders. Since the start of the time series in 1996, no fewer orders have been signed than the ones during 2011. 112 contracts in total, this is equal to just 9 million DWT.

Outlook:
The rejection by president Obama of plans to construct the Keystone XL-pipeline to transport Canadian oil sands output to US consumers is good news for larger crude oil tanker owners. Continued shipments of crude oil to the US Gulf Coast refineries will now remain unrivalled by larger US imports of Canadian oil. Moreover, a potentially increased seaborne export from West coast Canada to Asian customers could develop into a regular trading route in near future.

The closure of the Hormuz Strait is very unlikely; however, the impact on the tanker shipping industry would be truly multifaceted. A complete absence of Middle East crude oil into the market would result in a shortage of 19 million barrels of oil per day. Of this, approximately half is transported by VLCC through the strait every day. However, it appears that the tense situation in the area may have given some owners second thoughts and the desire to seek the next fixture in AG or somewhere else. By watching the tonnage list of VLCCs in AG, the balance between supply of tonnage and demand get closer every month.

Should the lack of ice and hard winter conditions in the relevant sea areas prevail, BIMCO expects that the freight rates in the crude oil segments will settle around USD 10,000-20,000 per day. By mid-February, ice conditions normally don’t get any worse – so by that time a firmer picture should have developed. The interval is rather wide – but necessary as the factors currently holding up rates are not permanent and exceptionally difficult to forecast.

The product tanker segments are affected by winter conditions – and also by the lack them. Handysize clean rates could stay elevated during the coming month, while the LR1, LR2 and MR rates are forecast to stay in the USD 5,000-10,000 interval, with more upside potential than downside.

in Copenhagen, DK

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