Teekay Tankers’ director chartering and freight trading, Suezmax, Mikkel Seidelin gives his take on the crude oil demand situation and the impact of consolidation on the sector
2020 has been a real roller coaster ride with regards to demand for and supply of crude oil. After the demand destruction from Covid-19 and the oversupply caused by the crude price war during Q1 2020 through into Q2, crude oil inventory swelled both onshore and through floating storage.
This caused a subsequent cut in OPEC + production. Although demand returned in Q3, it was from very low levels; Q4 demand recovery has been slow, leaving total crude oil demand several million barrels per day below pre-pandemic levels.
With renewed lockdowns in force in parts of Europe and the US, it is unlikely demand recovery will be seen in those parts of the world within the next few months. Since the majority of the supply-cutting effort, and through that draw down on inventories, has been driven by OPEC +, tanker demand has taken a direct hit.
In the medium term, we believe there are some positives a little further out in the future. First of all, current supply is significantly below current demand, with two to four million barrels per day projected being drawn from inventories. Inventories could be drawn down enough during 2021 to give strength to global oil prices and refinery margins to recover.
Second point, oil demand is expected to continue to recover globally during 2021, and this will hopefully be further boosted by the development and rollout of a vaccine, which at the moment looks positive.
“Tanker owners might look towards consolidation to maintain or develop economies of scale”
It is worth noting that pre-pandemic forecasts for crude demand growth were largely based on it taking place in emerging countries, with developed countries experiencing declining crude oil consumption. With early signs showing China leading the demand recovery charge, it can be argued that Covid-19 has simply push the pause button on an ongoing trend.
With the near-term possibility of a shrinking market, tanker owners might look towards consolidation to maintain or develop economies of scale and provide coverage for customers. The tanker space has historically been very fragmented, and while we saw some signs of consolidation in 2019, the attempts at consolidation in 2020 met with little to no execution.
A blocker on consolidation is how to finance it. Several public tanker companies are trading below net asset value (NAV), making any deal hard to accept for the seller and hard to structure for the buyer. This leaves traditional debt as an option; but some owners also meet challenges here, with fossil-fuel related industries out of favour with financial institutions.
Looking at services, commercial managers have enabled some consolidation, but this has been more successful in some tanker segments than others. It could be argued that in some tanker segments, commercial managers or pools have probably contributed to a more fragmented fleet profile.
The final word on consolidation will come from the buyers of freight, the charterers. Historically, charterers have been much more consolidated than shipowners, and this is unlikely to change anytime soon. But as more oil or energy companies look to divest their oil assets, this might be a game changer, depending on who snaps up these assets, whether it be other oil companies or new entrants. This could either further consolidate or fragment the industry.