Tanker Shipping - Will freight rates improve in 2011? – Demand growth appears not to support this!

Overview

Right now, all eyes seem to be on the Suez Canal as Egypt faces political unrest. Events have pushed the oil price above USD 100 per barrel for Brent crude

 

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Demand:
Right now, all eyes seem to be on the Suez Canal as Egypt faces political unrest. Events have pushed the oil price above USD 100 per barrel for Brent crude on speculation that oil supplies into Europe will be interrupted if the Suez Canal and the Sumed pipeline close down. Should the “democracy wave” prove to be contagious, affecting larger parts of North Africa and the Middle East, the oil and oil tanker markets will move into unknown territory.

As a consequence, demand for crude oil is increasing but unfortunately still not sufficiently for freight rates to take off. The recent surge in prices cannot be fully explained by a change in oil market fundamentals, as global stocks point to a continued well-supplied market despite a stronger-than-usual seasonal crude draw.

CRUDE -
64% of the VLCC volumes that were fixed out of the Arabian Gulf (AG) in January went to the Far East. This is a normal level but the trend is that relatively more crude oil goes East rather than West. Benchmark earnings from AG to Japan (TD3) averaged USD 10,000 per day in January. Surfing on a downward trend, VLCC earnings started February 2011 at USD 6,500 per day. For comparison, it’s worthwhile to remember that a VLCC earned USD 40,000 per day on average in 2010 on this route. Also, the Suezmax benchmark route (TD5) from West Africa to US Atlantic Coast, has been hit and spot freight rates dropped by 55% in January as monthly earnings averaged USD 7,000 per day. The decline in short term floating storage in the Middle East and Europe partially added to the tonnage oversupply.

It is worthwhile to notice that current freight rate levels are far below break-even levels. How far below depends on the specific vessel and the purchase price, OPEX and capital cost. To break even on a VLCC ordered at the top of the market in 2008 at USD 160 million, you need at least USD 60,000 per day – depending on the size of your capital costs. At the other end of the scale, a vessel breaking even at OPEX-alone only needs around USD 11,000 per day.

Fixtures for very large crude carriers (VLCCs) totalled nearly 1,650 last year, up 8% from 2009 and the first year-on-year (y-o-y) increase since 2005, according to data compiled by Meiwa International. China was by far the largest player in the tanker freight spot market, booking a total of 479 VLCCs; this was 34% more than 2009 and double that of the second largest participant, India.

As an indication of what could be in store for VLCC’s in the coming years, the world’s third-largest VLCC owner, N.Y.K. Line, has reportedly sold a 15 years old double-hull VLCC (265,539 DWT) to Greek interests for USD 28.1 million. To put the sales price into perspective, the scrap value for a vessel like this is close to USD 18 million.



PRODUCT –
The product tanker spot freight rates continued their upward momentum and gained some ground in December supported by Winter demand, bad weather conditions and petrochemical activities. After the turn of the year, rates came down significantly again and are currently trading around USD 10,000 per day.

Behind the stronger December markets was the higher activity between Middle East and India, China, South Korea and Japan, as well as bad weather conditions which caused delays. The higher activity between Middle East and India was backed by stronger gasoil imports, while the Middle East to China route was dominated by the kerosene and gasoil trade. Northwest Europe to the US clean spot freight rates increased by 40% compared to the previous month. This record gain was supported by the open arbitrage of gasoline, diesel and naphtha, as well as bad weather conditions on both sides of the Atlantic. In January activity slowed down and with it also rates.

Transportation of dirty products outpaced that of clean products in the Winter market. Both clean and dirty earnings rose on as the Winter took off in the northern hemisphere. Clean Handysize freight rates jumped from USD 5,000 per day to USD 15,000 per day. Meanwhile, LR1 dirty product earnings jumped from USD 8,000 per day to USD 27,000 per day. This development in the market made a lot of clean tankers shift temporarily into dirty trades.



Supply:
From now on the supply forecast from BIMCO will be separated into crude oil tankers and oil products tankers. The segmentation used is the one applied by CRS Ltd.

Last year crude oil tanker fleet growth was influenced by the IMO phase-out of single-hull tankers. In 2011 an equal number of newbuildings are expected to be delivered – but offset by only few demolitions. This will result in a fleet growth of an estimated 8.7%. Largest inflow will be in the VLCC segment. As fleet growth is expected to be strong also in 2012, supply side pressure on the freight markets seems inevitable.



The active crude oil tanker fleet has grown by 0.7% so far in 2011, caused by deliveries of 3.6 million DWT in the form of 17 newbuildings delivered, with 5 vessels being demolished.

BIMCO forecasts an inflow of crude oil tanker tonnage in 2011 to be 32 million DWT. With demolition expected to be significant at 2 million DWT.

BIMCO forecasts the inflow of oil product tanker tonnage in 2011 to be 7 million DWT, with demolition expected to be less significant than in 2010. The fleet is forecast to grow by 5.0% in 2011.

Outlook:
Since the tanker freight futures market settled down after the bull-run in the first half of November 2010, the forward curve on benchmark route TD3 has hovered around the USD 22,000 per day mark for both 2011 and 2012. This in turn is equal to a halving of rates from the 2010 average, but represents a 300% rise in rates from the current spot levels. 2011 is likely to provide a volatile market, with freight rates at a relatively low level.

Given that the global economy is still on the rebound from the crisis and is running a good deal below pre-crisis production and growth rates – in combination with a high price level on crude oil – BIMCO estimates that VLCC freight rates will stay under pressure from oversupply and a sluggish demand side. A rate scenario in low to mid-twenty thousand USD per day is likely. The depressed rate scenario is likely to be mirrored in all crude oil segments.

IEA estimates that global oil demand rose to 87.7 million barrels per day (mb/d) in 2010 (+3.2% y-o-y). In 2011, the demand growth will slow down to a rise by 1.4 mb/d equal to +1.5%. Like the overall GDP-growth, oil demand is set to grow along two tracks at uneven pace. IEA expects total OECD to see a contraction in demand while non-OECD nations/regions like China, Latin America and India will provide a strong rise in oil demand.

This means that the tanker markets may see only little support from the overall oil demand growth, and to an even larger extent than in previous years will depend on arbitrage trading, storage demand and global imbalances in crude as well as oil product stocks.

Even though current price structures on crude oil and oil products indicate little reason for floating storage to increase from an already low level, floating storage remains a positive upside risk for tanker rates.

As the market heads into lower demand second quarter, leaving a Winter market behind that provided for some optimism in both crude and product tanker markets, focus will be on inventories and spare refinery capacity to meet demand.

in Copenhagen, DK

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