Troubled waters below the surface for crude oil tankers

Troubled waters below the surface for crude oil tankers

Overview

The shift in oil demand is causing shorter sailing distances, so in order to maintain the fundamental balance with the present fleet in the tanker markets, the oil demand has to grow twice as much in the East as the oil demand shrinks in the West.

Demand for VLCC’s going East with crude oil is growing strongly, while the big oil consumers in the West are still not as thirsty as before the crisis. Overall oil demand is back at pre-crisis level but the new composition of the oil demand has shifted the balance in the market. The new balance means transport of oil over shorter distances, meaning fewer tonnes-miles. This has already impacted the tanker markets negatively and BIMCO forecast it will influence the freight rate outlook.

Shipping Analyst at BIMCO, Peter Sand says: “the shift in oil demand is causing shorter sailing distances, so in order to maintain the fundamental balance with the present fleet in the tanker markets, the oil demand has to grow twice as much in the East as the oil demand shrinks in the West”.

What is happening?
After a decent first half of 2010 for the VLCC’s with first quarter average earnings of USD 36,620 per day and second quarter earnings of USD 36,735 the beginning of September started the slide for VLCC freight rates. Now the third quarter is almost done at average time charter rate of USD 8,600 per day. Freight rates at these levels are hurting most owners as the daily running costs for a VLCC is around USD 8,000-10,000 per day. Only debt free vessels are able to break-even in these markets. Meanwhile, owners with VLCC financed by a lot of debt are facing break-even rates to the tune of USD 30,000-40,000 per day to service debt on top of operational costs.

This is a rude awakening for owners, but it comes as the result of continued weak demand from the largest consumers in the western hemisphere. Economic growth and subsequently stronger oil demand in the EU and US hesitates to take off. This has resulted in a contraction in oil demand of more than 3 million barrels per day (mb/d) – a massive drop not seen since the oil crisis in the 70’s and early 80’s.

Global inventories have been built up to new all time highs mainly in permanent on-shore storage facilities but also in tankers that are being employed as off shore floating storage facilities.

The demand for crude oil tankers is closely correlated with the global oil demand. IEA forecast a growth of global oil demand of 1.9 mb/d equal to 2.2% in 2010, but with a significant downside risk if the world economy were to stall.

But this volume growth will merely bring oil demand back to the level of 2007. As can be seen from the graph below, the global oil demand in 2010 is expected to surpass the 2007-demand by inches (0.12 mb/d). At the same time the VLCC fleet has grown by 12%.



Changes in demand
Since 2007 the composition of the demand picture has changed and it has changed in an unfavourable fashion seen with the eyes on a crude tanker owner. Demand has decreased in the western hemisphere and increased in the eastern hemisphere. Since 36% of global oil transport is delivered out of the Arabian Gulf this shift represents a move away from the very long hauls into the Atlantic basin and toward shorter long haul into the eastern part of the Pacific basin.

This shift in demand is unfortunate as the tonnes miles are fewer to Asia as compared to the US and EU. Much of the increased demand comes from China. China is asking for 0.76 mb/d more this year as compared to 2009. This makes the country responsible for 40% of global growth and 75% of growth in Asia in 2010. Meanwhile the West seems to settle down at a level 3 mb/d below 2007 in both 2010 and 2011.

The impact from lower US crude oil imports
High stocks coming out of US driving season ending on Labour Day have placed pressure on not only the oil products market but also crude oil market. The driving season used to be the traditional peak for US gasoline consumption covering June to September. However, this year the driving season in terms of finished motor gasoline imports was by far the worst ever recorded (since 1994).


Source: US Energy Information Administration


Source: US Energy Information Administration

High crude oil stocks in the US have definitely contributed negatively to the freight rate development on TD1 from Middle East Gulf to US Gulf (representing 1/3 of seaborne US crude imports).
Seaborne imports account for 2/3 of total US crude oil imports. While the domestic production remains firm around 5.5 mb/day, seaborne imports fluctuate more as the residual source of supply. The graphs show that US crude oil imports increased during the first half of 2010, which kept freight rates on that trade healthy. But during August and September US crude oil import have decreased by almost 1 mb/d, also impacting seaborne imports.

US imports from AG amounted to 1.7 mb/day in June, 1.6 in July, 1.55 in August and are on course for 1.5 in September. Demand has contracted by 12% to 1.5 mb/day over this short period of time.
Demand at the 1.5 level has previously supported freight rates around USD 20,000 per day. But this time around it’s different as Peter Sand explains: “In the world today, a decline in demand results in freight rates overshooting downwards. The combination of a global economy in limbo and the tightly balanced tanker market makes rates fluctuate more and the troughs get sharper and deeper”.

BIMCO forecast that freight rates for VLCC will firm as the winter season gets closer and forecast that the second half of the fourth quarter will bring rates back at USD 20,000-30,000 per day.

The deal with Asian demand
The distance from Ras Tanura in Arabian Gulf to Shanghai in China is 5871 nm that is only half the distance of going to LOOP or Rotterdam. That means the substitution rate is 2 for oil demand to impact tanker demand.



Where are we going?
The trend is clear; it is very positive that Asian demand has grown and will continue to grow, but to offset the drop in Western demand, the oil thirst in the East is not strong enough to offset the lower consumption in the West.

The underlying trend is more challenging for crude oil tankers than product oil tankers, as the business is developing towards higher growth in oil products transports than crude oil transports, as refineries are being built closer to the oil well today than 20 years ago.

While the US demand is forecast to grow slowly in 2010 and then drop slightly in 2011, demand from the EU is set for a 4-year in a row contraction going into 2011.

When Western demand growth eventually returns, the tanker demand will look strong again as Eastern demand in unlikely to slow down any time soon. Whether the strong tanker demand will also give higher rates is also dependent on the fleet development.

Contact - Shipping Analyst: Peter Sand PS@BIMCO.ORG

in Copenhagen, DK

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