Tanker Shipping - global oil demand disappoints expectations

Tanker Shipping - global oil demand disappoints expectations

Overview

Persistent weakness in Europe and the impact of Hurricane Sandy led to the International Energy Agency (IEA) cutting its global oil demand forecast for Q4-2012 down to 90.1 million barrels per day.
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Will Winter create the long-awaited demand, or will more VLCC tonnage have to be idled or be demolished?

Demand:
Persistent weakness in Europe and the impact of Hurricane Sandy led to the International Energy Agency (IEA) cutting its global oil demand forecast for Q4-2012 down to 90.1 million barrels per day (mb/d). As we are about to enter the post-2008 seasonally low 1st and 2nd quarters of the year, all eyes are on China, which the IEA expects will deliver 3/8 of the growth for the full year 2013. However, the most significant issue for shipping may very well be the expected higher oil supply in the OECD Americas (Canada Chile, Mexico and the US) that is foreseen to go up from 15.7 million barrels per day (mb/d) in 2012 to 16.4 mb/d in 2013. This builds on top of the strong growth from 14.6 mb/d in 2011.

August was the lowest point for Chinese crude oil imports in more than two years. This brought weakness to the market. But that weakness was reversed during September and in particular October, which came in at 5.6 mb/d. Pulling in the opposite direction was Japanese crude oil imports, which fell sharply in October from the year before, coming in at 2.57 mb/d. During November, the crude oil import giants of the East have pulled in the same direction; a demand lift that in conjunction with tighter supply in the Arabian Gulf, has sent VLCC rates beyond USD 25,000 per day on all routes going East.

The Atlantic back-haul for product tankers (going from US back to Europe), which is never in the limelight, found itself being at the centre of attention, as Hurricane Sandy left the larger New York/New Jersey area short of fuel oil and gasoline. A temporary waiver of the Jones Act enabled non-US flag owners to take this opportunity to lift gasoline out of the US Gulf into the disaster area on their way back to Europe. Earnings for doing this went beyond USD 30,000 per day in early November. More recently, the gasoline arbitrage appeared wide open, indicating that New York may still be short on stocks. The latter caused front haul rates (Rotterdam - New York) to go beyond USD 10,000 per day for the first time in two months.

Supply:
The supply of 179 new crude oil tankers saw the fleet growth for the year so far lifted to 4.5%. Demolition of still younger crude tanker tonnage equal to 8.3 million DWT at an average age of 23 years provides a much-needed, but not fulfilling, counteraction to the new entries.

The product tanker fleet has grown by another 71 new product tankers so far this year; last year 103 were delivered and in 2010, 159. Such low numbers of new deliveries is one of the main arguments why the product tanker segment may see some kind of market balance as one of the first segments to do so.

With the help from another 47 product tankers sold for demolition during 2012, the product tanker fleet has grown by just 1.5%. As we expect to see double-digit delivery numbers in December, the fleet may grow by a tad more than 2% for the full year.

As the orderbook get thinner, the popularity of MR tonnage becomes crystal clear. Just 202 product tanker orders are left on the books, out of which 117 are MR tonnage of 45,000-52,000 DWT.

On the contracting side, just 4 new orders for product tankers have emerged since August, all MR tonnage. For the crude oil tankers segment, 7 new orders were signed, out of which 4 VLCC’s done by Chinese interests at Chinese yards appear on record.

Clarksons got it spot on the other day when writing: “To scrap or not to scrap” about VLCC demolition. Four years into the current crisis, all with challenging markets and the past two providing earnings below breakeven rates (OPEX + financing costs) for most owners, the question remains: When do owners start to break up significant numbers of VLCCs to better balance the market?

The general opinion is that the VLCC market would look a lot better if some 50 vessels were taken out of active trading for good. By using data from Vesselsvalue.com, BIMCO established that 53 VLCC’s have been valued at demolition price for more than a year, since mid-2011, without being demolished. This allows us to see the demolition potential from a different angle, that of “next planned survey”. For tankers at these ages, the 4th Special Survey, or next Intermediate Survey, is very likely to become costly and may well turn out to be the motivation needed for recycling the vessel. This can be done by applying an investment calculation where the residual life of the vessel, expected future freight rates, and the cost of capital, is weighted against, most importantly, the steel replacement cost.

BIMCO is monitoring this situation and conclude that the future demolition potential may be closely linked to the upcoming surveys. Since demolition values have out-performed the second-hand values for close to 50 VLCC’s since mid-2011, with only a handful of them being recycled, the value of on-going trading must be seen as being higher by existing owners than what is reflected in the current asset value. The coming year will tell if the hypothesis of the costly surveys is right or wrong.

In the graph below, 60 VLCC are plotted according to latest date for survey. Larger dots indicate two or three ships on the same date. Four vessels are due for survey in December 2012, whereas 17 are set for 2013. As a Special Survey is generally more costly than an Intermediate Survey, 2013 apparently holds most optimism if this indicator proves to be any guidance into the demolition potential of VLCCs. Poor freight market condition may affect the decision by some owners, who would then opt for not going through the expensive survey as the future earning potential of a 20 year old vessel may not justify it.

Outlook:
In its recently released World Energy Outlook report, the IEA states that the global energy map is changing, with potentially far-reaching consequences for energy markets and trade. The map is being redrawn by the resurgence in oil and gas production in the US. Energy developments in the US are profound and their effects will be felt well beyond North America and in the energy sector.

Should the above become a reality even to some degree, it will affect shipping. Upfront, it seems likely that crude oil tankers could see business reduced concurrently with a still-growing domestic oil production in the US. On the other hand, product tankers may see increased business, as existing refinery capacity can take advantage of abundant/cheaper feedstock prices and expand production for exports.

Tanker owners have been amongst those hit hardest by the slumping freight market. Household names are now amongst the casualties, with more to come if the unsustainable low freight rates do not improve. Currently, the seasons, be it hurricanes or Winter, provide some lift to rates and BIMCO forecasts that rates will be fairly firm for the next few months.

BIMCO expects that average earnings for all the three crude oil tanker segments will stay around USD 10,000-20,000 per day.

In the product segment, BIMCO expects earnings in the interval of USD 10,000-20,000 per day on benchmark routes for LR1 and LR2 from AG going East fizzling out somewhat after a surprising upturn in recent months. Handysize and MR clean rates are expected to possess the potential of a Winter market, leaving freight rates around USD 8,000-15,000 per day.

in Copenhagen, DK

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