Energy analytics specialist Vortexa and the research arm of Braemar Seascope take a look at the fundamentals of the Covid-19 tanker market and a give an indication of the near-term forecast for the supply and demand balance*
Vortexa is an energy analytics company using AI and industry expertise to provide a complete view of crude oil, refined products, LPG, and LNG flows globally. Braemar ACM is a public-listed shipbroker based in London that produces market intelligence platform – Braemar Markets.
In the most recent webinar* collaboration, Braemar ACM’s regional head of research, Anoop Singh noted that the Baltic Exchange VLCC FFA indicator, TD3c had been very strong though March, April, and May in 2020, with an average of US$100,000/day or more. “That was basically triggered by the price war between Saudi Arabia and Russia,” he said. “Almost simultaneously, the Covid-19 virus went global and hit oil demand, producing a strong contango in the fuels and crude oil market.”
After the highs of the March, April, May 2020 market, the VLCC market crashed and by August the freight rate was around 15% of earlier levels: “A proper come down in the market,” added Mr Singh.
One indicator of the short-term view of the market is the FFAs. The FFA market had been expecting a reasonably firm third quarter; in June 2020, the Q3 2020 FFA was around US$30,000/day. “Sentiment has weakened,” said Mr Singh. Freights came off to around US$18,000/day, which was approximately the level of the spot market.
“The port congestion is China is now a secondary storage story slowly strangling supply”
As Q4 approaches, the sentiment in the VLCC FFA market is quite firm at US$40,000/day, noted Mr Singh.
Vortexa’s senior freight analyst Arthur Richier noted the changes that have taken place in tanker ton-mile demand in the last 12 months on the benchmark routes: MR UK Continent to US Atlantic Coast down 7%; LR2 Middle East Gulf to Japan up 19%; Suezmax West Africa to UK Continent down 35%; and VLCC North Sea to China down 68%.
Part of the change was the unwinding of floating storage ahead of predictions and oil major’s cutting back on production. Mr Richier noted that in September 2019, the demand for VLCCs from North Sea to China was equivalent to 1.5M tonnes per month. “In the last months, the demand has been closer to 500,000 tonnes,” he said, “which translates to two VLCCs per month.”
While transatlantic product trade weakened, damaging MR demand, the rise in naphtha demand was a bonus for LR trades from the Middle East Gulf to Japan.
Vortexa noted that there has been a 10% drop in tanker ton-mile demand over the course of 2020 compared to the long-term seasonal demand observed by Vortexa. “It now makes more sense to drawdown stocks that to look further afield,” he said. “We are not expecting the downward trend of the next 12 months to be reversed,” said Mr Richier.
This leaves the question of how or if there will be a recovery in demand after the Covid-19 pandemic? “Tanker demand cannot move too far away from oil demand in the long-term,” said Mr Singh. “Compared to previous crisis, such as the Financial Crisis of 2008, this was a five times greater hit. Amazingly, China has bounced back to pre-Covid-19 pandemic levels of oil demand already and India is not far behind,” noted Mr Singh.
The reaction of China and India are important indicators of seaborne demand. “Together, China and India account for about a third of crude oil demand,” said Mr Singh, “but for everywhere else, it is a long road back and there will be some permanent losses in demand.”
He added: “One manifestation of this weak demand is sky-high levels of (crude oil) stocks, which are refusing to budge.”
“On the subject of floating storage, the question on everyone’s mind is: when does the great unwind happen?” said Mr Richier. Since the middle of 2020, there has been a slow reversal in the size of floating storage as stocks have been drawn down. He noted that Asia is the dominant force in the storage market. This trend has been underlined by the massing of VLCCs off Chinese ports waiting to unload. The port congestion is China is now a secondary storage story slowly strangling supply.
“Floating storage is probably now the biggest deal in forecasting tanker supply,” said Mr Singh. Almost 10% of the tanker fleet is in storage; for VLCCs, it is 11% of the fleet. That portion of the tanker fleet which is unavailable due to congestion will come back onto the market. If a VLCC loaded in China is August/September, it is reasonable to expect that within three months the cargo will have been discharged and the vessel will be available to work again.
For the tankers in longer-term storage, the process will be slower. Braemer ACM notes that often it was the older VLCCs that were fixed for storage. “A third of the VLCCs fixed for storage were 20 years old or older,” said Mr Singh. “When these come off storage in later 2020, these will not be competing in the spot market (against younger tonnage).”
“It now makes more sense to drawdown stocks that to look further afield”
Braemar ACM noted that refinery runs East of Suez are unlikely to reach levels seen in 2019 until the middle of 2021. US refinery runs could be the first to absorb stocks and see a return to imports of crude oil, but this is not expected before the end of 2021. This will be greatly helped by Saudi Arabia’s push to increase its presence in the US market, noted Mr Singh.
On the supply side, there is more to fleet growth than the size of the orderbook and the ageing fleet. “The first impression is that there is not a large orderbook,” said Mr Singh, “and that is correct.” The current orderbook is around 9% of the tanker fleet, which is low by historical standards.
“The exit age of tankers from the fleet changes with scrap prices and other factors, but the approximate age is 20 years old,” said Mr Singh, “which is around 7% of the fleet.” The figures suggest the headline fleet will only grow by 1.5%, a very low level of growth by historical standards. Braemar ACM argued that this headline figure ignores tankers coming back into the fleet from floating storage or retrofit and other non-trading activity, such as arrest and sanctions.
Under this scenario, the tanker active/available fleet could actually grow by as much as 6%: “The key insight is that active fleet growth is more relevant than the headline fleet growth,” said Mr Singh.
In conclusion, on the demand side, a return to growth in tanker tonne-mile demand is not expected until Q1 2021 at the earliest, with tonne-mile demand shrinking in Q4 2021. On the supply side, Braemar ACM is forecasting high active fleet growth during a period of relatively low base demand growth, noting: “It is only by 2022 that we start to see the market re-balance in favour of utilisation.”
*Adapted from the webinar “Tanker Market Outlook: Charting the course ahead” presented by Braemar ACM and Vortexa, 12 August 2020.