Tanker Shipping - Demand is outstripping supply for the first time since 2008

Tanker Shipping - Demand is outstripping supply for the first time since 2008

Overview

Freight rates are difficult to predict. This time around, the sudden tightness took us by surprise in a positive way.
Demand:
Freight rates are always difficult to predict. This time around, the sudden tightness took us by surprise in a positive way. Beyond that crazy third week of November, we almost nailed it for crude oil tankers. Does the market hold more of that for us? During December, most certainly; going into January, the uncertainty is greater.
The demand side is seasonally strong now, but as touched upon in the macroeconomics section, the world has revealed limits to its thirst when it comes to oil.

So what is providing the stronger freight market? It is being delivered by the supply side! However, only the newbuilding side of it, because the crude oil tanker demolition segment has contributed very little, both in line with the all-year BIMCO forecast.

Respectively, the fleets of the three segments of VLCC, Suezmax and Aframax have grown by 1.1%, -0.5% and -1.7%, building on a development that started in 2013. Demand is outstripping supply for the first time since 2010, bringing about stronger freight rates.

In the product tanker segments, the drop in oil prices may have stimulated demand for LR1s and LR2s right away, with the first and second half of the year being worlds apart. Handysizes and MRs caught up in Q4 on the back of more trading activity in a market where prices suddenly moved as compared to the rather flat and steady oil prices seen during the first six months of the year. The freight rate at end-November was a six-year-high for all product tanker segments.
 
A large oversupply of oil from non-OPEC as well as OPEC-nations makes it a mutual “blame game” as to who should reduce output to keep the market in balance and prices high. Neither side is able to take co-ordinated action, making the fight for market share a focal matter as prices keep tumbling.

Supply:
As crude oil tankers are literally the only ships making very good money in the market today and potentially also tomorrow, it’s no surprise at all that investors are putting their money into crude oil shipping. The game may be changing, though, because of China’s stated interest in bringing more crude home on national tonnage. As crude oil imports into China are affected by slower economic growth, there remains less room for independent operators to serve the world’s biggest crude oil importer.

During September and October, 6 VLCCs, 10 Suezmaxes and no Aframaxes were ordered. This activity brings the total number of VLCCs on order up to 91, up from 61, eighteen months ago.

With 22 VLCCs delivered in 2014, of which six in the past two months, the segment is on to something good and vital for the market balance. In the past six years (2008-2013), 48 new VLCCs have been delivered on an annual average. 2014 will see a maximum of 25 delivered. 2015 has just 27 VLCCs scheduled for delivery, 2016 has 49. A window of opportunity is certainly opening up here for the fundamental balance to improve in 2015, assuming that demand remains decent.

Meanwhile, interest in new product tanker orders has dried up. Only 20 new orders have surfaced since 1 July. The preference of product tanker investors is clear: 16 out of the 20 new orders landed in South Korea. During first half of 2014, 57 new ships were ordered.

2014 was set to be another big delivery year for MRs. With 75 being delivered so far and 15 potentially still to come, 2014 is already topping the full year of 2013 that saw 72 new MRs. Since the start of 2014, the MR fleet has grown by 7.4% year-to-date.

The dire market conditions in the first half of the year have resulted in an elevated level of postponements taking place. Annual supply growth is still strong, though.

Outlook:
Can the higher freight rates be sustained now that crude oil tanker supply side growth for 2015 is expected to stay as low as that in 2014? It depends on all the individual owners and operators’ continued focus on slow steaming, on cutting fuel costs and realising the only thing higher speed may bring about is a transference of profits from the owners and operators to their customers.

If lower oil prices can continue to generate higher demand for product tankers, Q1 could have some positive trends lined up. This will happen in the case of normal, seasonally lower oil demand and an unchanged level of oil supply, as producers need more time and certainty before adjusting output to a new normal level. Maybe cancellations and postponements of investment in the oil industry will follow, which in the end may reduce production and add supply side pressure to the low oil price.

Just before the curtain fell on the product tanker segment, where supply is more than available before the long-awaited demand boost arrives, freight rates increased sharply. Not since 2008, have we seen Handysizes at USD 28,000 per day and MRs at USD 24,000 per day. This bodes well for the future; rates are responding to changes in demand by spiking and not just wobbling. With a supply-side that picked up from last year – and is set to go even higher in 2015 – the efforts made by individual owners and operators to alleviate the pressure from oversupply appear to be bearing fruit. Going forward, it is important for product tankers to keep slow steaming around in order not to depress freight rates.

For December/January, BIMCO expects earnings for the VLCCs at USD 30,000-55,000 per day, Suezmax crude oil tankers at around USD 20,000-45,000 per day and Aframaxes are expected in the region of USD 20,000-40,000 per day.

In the product tanker segment, BIMCO expects earnings on the benchmark routes from AG to Japan for LR1s to stay around USD 15,000-25,000 per day. LR2 ships are too enjoying the stronger market, BIMCO expect earnings around USD 20,000-35,000 per day. Handysize rates are seen strong in the USD 18,000-30,000 per day, with MR average rates in the interval of USD 12,500-25,000 per day.


in Copenhagen, DK

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