Tankers had an exuberant end to 2019 and both oil demand and annual average earnings should be stronger in 2020, but concerns remain, as MSI’s Tim Smith explains
Accelerating tanker demand growth is a key feature of MSI’s 2020 forecasts and although the IMO sulphur cap is a part of this story, it is not the sole driver. Wider conditions in the oil market will likely have an equal or greater effect on the state of the tanker market in 2020.
Refinery throughput is just an important component and effect tanker demand. We expect a rebound in refining activity in 2020. IMO 2020 will be part of this and we also expect oil demand growth, new refinery capacity and a tighter stock position to help.
Using the MSI HORIZON platform to model changes we created two market scenarios.
In the first scenario (Chart 1), rising GDP and a resilient world economy drive increased oil and product demand. In the second, we challenge the positive assumptions around IMO 2020 and the uncertainty in wider oil market and macroeconomic conditions.
In the High Case scenario for demand global oil demand is positioned at 1.8%. This drives refinery throughput growth even higher in 2020 and seaborne crude trade volumes growth increases to just above 3%.
This drives up overall demand growth – combined total tanker demand growth is shown in Chart 2.
Chart 2 shows the two components driving overall market utilisation – supply and demand growth – under MSI’s Base Case and High Case scenarios.
We have reduced fleet supply growth by close to 1%, simulating further restrictions in available tonnage. This increases the premium on demand growth versus supply to about 2%, i.e. demand growth, at just above 4.5%, outpaces supply growth at close to 2.5%.
The result is further upside for the market, as shown in Chart 3. Timecharter earnings (non-scrubber fitted) fully regain levels seen in 2015 for the full year of 2020, and earnings increases are retained and/or exceeded in 2021.
The High Case views are eminently plausible, but the market’s capacity to disappoint is arguably also greater.
We remain of the view that the global economy faces considerable challenges including the continued weakness in underlying oil demand. Supply and demand growth remain finely balanced next year; in a downside scenario, we could see more muted effects on underlying trade growth from IMO 2020. This could lead to much weaker overall demand growth.
In our second scenario we applied direct changes to regional crude and product import levels in MSI Horizon to simulate varied market condition and the impact on the demand environment. While the MSI Base Case displays incremental demand growth for regional trade flows in 2020, under a Low Case, projections are considerably weaker. Recent OPEC cuts present downside risks to the market which are likely to restrain growth across the first half of the year.
We have targeted critical drivers, in particular crude imports and product imports in SE Asia and Europe, simulating the effects of weaker refinery throughput growth and lower demand for middle distillate imports to meet IMO 2020 requirements. The overall result is effectively to halve combined crude and products trade growth, from 2.6% under our Base Case to 1.1% in the Low Case.
In a low trade growth environment, pressures from the supply-side would also be more acutely felt. Scrapping continues to be a risk to our forecast. 2019’s scrapping volumes across all tanker segments have been ‘minimal’ levels, at an estimated 4.7M dwt. We expect an increase in scrapping activity in 2020, more than quadrupling year-on-year to 22.0M dwt. If we halved this it would have the effect of pushing up fleet growth by about 1%, as shown in Chart 4.
Combined with the Low Case demand construct in 2020, we would see significantly lower earnings across the 2020/21 period versus our Base Case, with a declining profile to the outlook.
Currently, tanker earnings are performing well and a sustained recovery from the lows of 2017/18 is MSI’s Base Case view.
In a low trade growth environment, pressures from the supply side would also be more acutely felt. Scrapping continues to be a risk to our forecast.
Tim Smith is director - oil and tanker markets at Maritime Strategies International