Thanksgiving Day has been named as the day the tanker market will reach equilibrium. That is, on 22 November 2018, the supply of tankers will equal the demand for tanker tonnage and the market will rebound. I think the approach of any sort of equilibrium in the market will be evident before that date. The market will become increasingly volatile, with wild swings in spot and charter rates.
But why Thanksgiving? This date was the consensus view of a panel of crude oil tanker experts speaking at the 12th Annual Capital Link International Shipping & Offshore Forum in New York last week. Speaking at the plush Metropolitan Club (also known as the “Billionaires Club”), Teekay Tankers head of research Christian Waldegrave noted that the tanker fleet supply growth had only reached 6% in 2016, and fell to 5% in 2017. To some extent this had been supported by VLCCs re-entering the fleet from floating storage duties. He felt that the peak of deliveries was about to, or had actually occurred.
Scrapping is the key driver
With additions to the fleet slowing down, the dominant driver on the supply side will be the level of scrapping in 2018. My understanding is that this seems to accelerating. Mr Waldegrave said “At the start of the year, I had a forecast of 10-12M dwt of scrapping, and we have had 4M dwt in the first couple of months, so we are having to revise this.”
International Seaways chief executive Lois Zabrocky reported that her researchers estimated there were 122 VLCCs over the age of 16 years old, which faced significant capital expenditure such as drydocking. These were potential scrapping candidates and in her view, there had not been any significant scrapping in the VLCC sector since 2013. This echoed an earlier remark on scrapping by Navios Corporation vice chairman Ted Petrone, who said VLCC scrap sales were running at around 15 vessels (this includes unreported sales) so far this year, and that brokers had told him another 10 scrapping sales were in the market.
Demand is king
“Demand is king,” said Ms Zabrocky, and noted that demand for products in the East was firm, as were the crude oil supplies from the West. The panel felt there would be no game-changers on the demand side, with Mr Waldegrave noting that as far as OPEC was concerned, leading producer Saudi Arabia is looking to float Saudi Aramco, which would require a stable and firm crude oil price and no surprises. However, Mr Waldegrave suggested if there was a surprise on the demand side, it would be an increase in tonne-miles now that the US was exporting crude oil to China.
The panel moderator, Citi Research director airfreight, surface and shipping research, Christian Wetherbee asked the panel to summarise their thoughts on supply and demand, and give an indication of when the tanker market would be in equilibrium. Ridgebury Tankers partner and chief executive Robert Burke set the tone. “By Thanksgiving,” was his immediate reply. Mr Petrone added his voice to the consensus, specifying “American” Thanksgiving, which falls on 22 November, and the others agreed, although some chose a wider range of dates which included Thanksgiving.
To my mind, the danger of the Thanksgiving tanker market rally forecast is that it may come true. As equilibrium approaches there will be significant swings in charter rates, and those older VLCCs, that are currently seen as scrap candidates, will become financially viable to trade longer. This will delay the clear out of the old turkeys from the fleet.