The oil market is notoriously linked to geopolitics. Most recently, the political situation in Venezuela creates turmoil in the region and particularly affects crude oil exports.
Demand drivers and freight rates
The tanker market has made the most of a solid and much needed boost that was ignited by falling oil prices, which started in early October. Prices were pushed down by all-time high Saudi Arabian crude oil production that peaked at 11.1m barrels per day in November. Earnings for all sizes of crude oil tankers touched USD 50,000 per day as they peaked in late November and early December 2018.
It was quite a bounce for a dead cat, as US-Saudi politics and Chinese tradesmanship created a temporary recovery for the oil-tanker market.
Earnings for oil product tankers followed suit, peaking in December. Rates for LR2 and LR1 tankers reached USD 32,000 per day, but those for MRs disappointed because they only reached USD 20,000 per day.
After deduction of operational expenditures (OPEX), bunker cost and capital expenditures (CAPEX), all crude oil tanker spot fixtures made in Q4-2018 were profitable. Oil product tankers were only seeing profitable spot freight rates in December.
When it comes to time charters, it’s been an almost non-existent market as the bid-ask spread between charterers’ and owners’ rate expectations have been impossible to bridge in a such a poor market. Massive change is not likely to happen any time soon – and this goes for both oil-tanker sectors.
Oil product tankers benefited as global refiners increased throughput and refined oil products were shipped and stored at different facilities around the world. But oil product tankers did not get the full benefit of the falling oil prices because Chinese crude oil imports (link to news story of 31 Jan) - which grew massively in Q4 - went, to a large extent, into strategic petroleum reserves as well as to independent Chinese “teapot” refiners' storage. The crude oil wasn’t immediately refined, so no products were produced for exports.
December exports of oil products from China are normally seasonally strong, but they dropped 5% in 2018 compared with December 2017.
Chinese oil product exports were up by 12% from 2017, while imports grew by 12.8%.
One of the significant and developing oil tanker trades in 2018 was US crude oil exports, which went from one record to the next. The most recent data we have is from October, when they reached 8.6m tonnes. The conclusion is that US crude oil exports recovered extremely well – finding alternative markets fast – to limit damage from the trade war with China, which stopped buying US crude oil from August 2018, having bought 22% of all US export in the previous seven months [See: www.bimco.org/news/market_analysis/2018/20181106_no_us_crude_to_china_in_september?p n=1 ].
Despite many rumours, China has not imported any crude oil from the US since then. Nevertheless, five VLCCs and one Suezmax are reportedly heading for China with US crude oil. According to AIS data sourced from VesselsValue.com, only the Suezmax tanker is currently bound for China, with four of the VLCCs headed for Singapore and going to South Korea.
As expected, it has been difficult to assess the impact of the US sanctions against Iran. Exports out of Iran have come down, but it has been more than offset by increased production and exports elsewhere in the Gulf region – mainly by Saudi Arabia in Q4-2018 – as geopolitics ended up in the driving seat and Saudi Arabia flooded the oil market.
The crude oil tanker fleet grew by 0.8% in 2018, as very weak demand growth brought down freight rates and caused demolitions to hit an eight-year high. For 2019, BIMCO expects high fleet growth to become a problem again, forecasting 3.4% fleet growth for the full year.
If the scheduled order book is anything to go by, newbuild deliveries will be dominated by VLCCs coming into the market at a steady flow. Note that BIMCO always expects the scheduled order book to fall short by 10%, in addition to a sector-specific slippage rate of 25% for the oil tankers.
For crude oil tankers, the size of the order book is 50 million DWT, with close to half of this expected to be launched in 2019.
For 2018, fleet growth was quite diverse; the Aframax grew by just 0.3%, VLCCs' growth was on a par with that of the overall fleet, at 0.8%, while the Suezmax fleet grew by 2%.
BIMCO similarly expects higher fleet growth for the oil product tanker sector, primarily on the back of much lower demolition activity. Nevertheless, the fleet is only set to grow at a level that should be manageable if demand growth picks up. In the case of demand staying as weak in 2019 as it was in 2018, any fleet growth will naturally be too high.
For 2018, fleet growth was quite diverse, with MR/Handy growing just 0.8%, LR1 growth on a par with overall fleet at 1.8%, and the LR2 fleet growing by 4.1%. As can be seen from the freight-rate developments where LR1 and LR2 perform well and MR not so well, fleet growth for individual sub-sectors doesn’t matter much. It is the overall fleet growth for the whole sector that matters.
The hardship in the oil product tanker freight market has resulted in placement of limited newbuilding orders – a situation that will help the market recover and, eventually, become economically sustainable. From 2018-2020, fleet growth will stay below 4% per year. Currently, the order book for oil product tanker has dropped below 13m DWT for delivery in 2019-2021. To put this into perspective, almost 10m DWT was delivered in 2016 alone.
The oil market is notoriously linked to geopolitics. Most recently, the political situation in Venezuela creates turmoil in the region and particularly affects crude oil exports. The newly set up US sanction targeting Nicolás Maduro's regime will most probably limit the imports of crude oil into US gulf refineries. In addition, some oil product imports may be affected, but BIMCO does not expect it to affect majorly the overall market.
Alternative suppliers of the ‘lost barrels’ include neighbouring Canada and Mexico, in addition to the preferred shipping choice: the Middle East. Heavy sour crude oil is at stake here; while the US is now the top oil-producing nation in the world, it primarily produces very light, sweet crude oil, which is not a substitute for the Venezuelan crude oil quality.
Increasing crude oil production in the US is likely to be a positive factor in the tanker market in 2019, benefiting crude oil and oil product tankers. According to the US Energy Information Administration's Annual Energy Outlook 2019, US crude oil production will continue to grow every year until 2027. It will be almost solely tight oil - that is, of light sweet quality.
The swing factor this year will be China. Having grown its crude oil imports continuously over many years – and by a massive 10% in 2018 – 2019 is set to be weaker as sustained macroeconomic headwinds slow down imports. As always, the origin of imports to China matter a lot to the tanker shipping sector.
Fleet size glossary
• Aframax: 80,000 – 119,999 DWT
• Suezmax: 120,000 – 199,999 DWT
• VLCC: 200,000+ DWT
• Product: 10,000 – 29,999 DWT
• MR/Handy: 30,000 – 59,999 DWT
• LR1: 60,000 – 79,999 DWT
• LR2: 80,000 – 120,000 DWT