For both tanker supply and demand, deviation from the trends of the last two decades is likely to be pronounced, writes MSI director - Tanker Markets and Energy Tim Smith
Critical to an accurate understanding of the tanker market is to realise that 2019 and 2020 were abnormal not just for demand but also from a supply-side perspective.
Scrubber retrofit and floating storage applied the brakes on available fleet growth for two years. In the depths of the demand shock of 2020, the market effectively got a ‘free pass’.
A supply hiatus on this scale had not happened since the start of the millennium. Since then fleet growth has been consistently positive with tanker capacity doubling over the same time. However, what is crippling the market now is that underlying capacity growth did not stop – but rather kept rising at a similar rate to its trend pace throughout 2019 and 2020.
In 2021, the music has stopped on this supply-side buffer and conditions are dire as a result. This downturn may persist longer than we expect. We have lowered our outlook modestly in our current Base Case but the prospect of a continued weak market in 2022 is real.
As Chart 1 shows, what is interesting is the supply-side outlook continues to be abnormal. Recent history, and our projections, see an end to the trend in fleet growth. While available capacity has been the cause of deviation from the trend in recent years, we see actual capacity start to move away from the growth trend in 2023-25.
This move is forecast to be relatively sharp and sustained, as scrapping activity increases to levels not seen since the 1980s. The supply-side becomes the engine of the tanker recovery, with demand doing very little of the ‘heavy lifting’ beyond the Covid recovery phase.
Although our scrapping forecast may seem overly optimistic or even outlandish, in the context of the evolving fleet age profile, and with respect to a fleet that has doubled in size in 20 years, it does not look so stark.
Chart 2 shows total tanker scrapping, alongside scrapping as a percentage of the fleet (scrapping in year as percentage of end-of-year fleet of previous year) and the percentage of the fleet at or above 20 years old.
Firstly, we can see that forecast scrapping volumes are huge, but as a percentage of the fleet, annually they remain below 5% across the forecast. This is significantly lower than the 1980s, which in the middle of the decade reached 10%, and the early 2000s which saw scrapping exceed 5% of the fleet for four years.
What is more, this still sees the aged proportion of the fleet rise well above its recent historical range. In the 2010s the 20+ year-old fleet averaged 4-5% of total capacity. In the first half of the 2020s this will rise to 7-8%, even with all the scrapping predicted.
Even though we cannot predict with certainty the precise timing of the scrapping wave headed this way, the trend is almost guaranteed. This gives the tanker sector an unusual (looking at history at least) level of support from the supply-side. The demand-side is subject to far more uncertainty, both due to its nature – it is much more complex – and because we are moving into a period of transition.
This market can no longer rely on ‘reverting to trend’. With both supply and demand, deviation from the trend of the last two decades is likely to be pronounced. Several key questions therefore present themselves when we look at tanker markets over the longer-term from a demand-side perspective.
Firstly, the question most people want to understand is, how quickly will oil demand growth decelerate from historical trend and then reverse direction? Secondly, how will tanker demand fare relative to underlying oil demand?
Out to 2025, we expect two phases for oil demand. Firstly, the recovery from Covid-19, which will involve a period of strong demand growth, followed secondly by a deceleration to sub-trend growth rates in 2024-25. Beyond this, we see oil demand start to decline, and MSI’s HORIZON system will soon incorporate long-term projections for global energy consumption, addressing the energy transition in more detail.
In the shorter-term, our expectation is that in 2021, oil demand growth will far outstrip tanker demand growth, with pressure on crude trade volumes in particular translating into overall tanker demand growth (inclusive of crude, products and chemicals) of 2.2%, versus oil demand of 5.9%.
We expect these two growth rates to reach approximate parity in 2022 at close to 3.5% – a strong year. However, our expectations for tanker demand beyond this see growth decelerate and underperform oil demand. This is when the tanker market will become more reliant on supply-side restraint and high levels of scrapping to sustain its recovery.
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