Covid-19 has thrown the tanker market into turmoil and spot earnings in 2021 have been dire to date. Broker projections suggest things aren’t about to pick up any time soon
The tanker market at the start of 2021 was summed up by Norwegian shipbroking house, Fearnleys, which stated: “2021 has kicked off with a whisper; for the first time in years we have seen fixtures concluded yielding negative returns.”
It’s a view shared by Clarkson Research Services (CRS); during January 2021, on the Suezmax tanker Middle East Gulf-Mediterranean route, CRS reported the spot rate on offer was WS14, a TCE of minus US$6,300 per day. So far in 2021, this route has an average TCE of minus US$8,300 per day. In the Aframax tanker sector, the Med-Med route TCEs are being calculated at minus US$2,500 per day and a 2021 average so far of minus US$1,000 per day.
This implies that tanker operators are paying charterers to carry cargo, but actual fixtures at these spot rates are rare. One tanker operator has suggested the reason for fixing at a negative rate would be to cover some costs of repositioning the tanker into an area/basin where rates were firmer.
CRS also noted that one Suezmax cargo had been fixed to a VLCC. With weak rates in the VLCC sector, this could herald the start of VLCCs poaching Suezmax trade. The downturn in the spot rates and the negative implications from the TCE calculations were not reflected in the timecharter market. Suezmax rates remain at aroundUS$16,500 per day and Aframax rates at US$15,250 per day for one-year timecharters.
If the January rates were poor, there may be something to look forward to as the year progresses. US shipbroker McQuilling Services has provided its view of the near- and medium- term picture for the tanker market in its 2021-2025 Tanker Market Outlook. Traditional tonne-mile demand growth is projected to increase by 5.0% for VLCC tankers in 2021; however, including demand changes from the unwinding of floating storage, McQuilling Services’ models reveal a 12.5% reduction year-on-year, and down 5.1% from a more normalised 2019 baseline.
On the product tanker side, McQuilling Services believes demand for tankers transporting refined products will find substantial support from increasing utilisation of refinery capacity in the Middle East, whereby gasoil and jet fuel find growing export opportunities to the west and notably Europe. Product supply, particularly northern Europe, may come under pressure from regulatory shifts and fuel switching.
“The reason for fixing at a negative rate would be to cover costs of repositioning the tanker into an area where rates are firmer”
McQuilling Services finds the Middle East naphtha balance coming under pressure from shifts in refining yields, suggesting longer-haul movement to Asia from west of Suez export areas. MR tanker demand is projected to be supported by activity between the US Gulf and Latin America, while refinery closures in the Australia/New Zealand region are underpinning growing demand in the east, where additional positive factors emerge, including robust growth from the Middle East-East Africa.
There was other good news for tanker tonne-mile demand from the Atlantic basin. Shipbroker Gibson reports that Brazil is reaching new highs of crude oil exports. Exports reached 1.4M b/d in 2020, and Petrobras has announced plans to double its exports between 2021 and 2025 from 445,000 b/d to 891,000 b/d. In another move to boost exports, Gibson reports that Brazil plans to sell half its 2.2M b/d refinery capacity to foreign operators. The assumption is that foreign operators will purchase foreign crude oil to process, freeing up more domestic crude oil for export.
On the supply side, Covid-19 played havoc with tanker delivery schedules. Many shipyards were forced to close completely during the lockdowns of 2020. The uncertainty over fuel for a lower emission working life has seen tanker ordering activity slip approximately 40% below the 20-year average, according to Galbriaths’ head of the research department Annika Bartels, speaking at the Tanker Shipping & Trade virtual conference in November 2020. “The final number of 2020 deliveries will certainly be lower than what we are seeing now, and some vessels will slip over into 2021,” she said.
The decline in contracting occurred long before the outbreak of the Covid-19 pandemic and the causes are more fundamental. “This [lack of ordering] is mostly due to tighter financial availability, lower capacity of shipyards, and of course, the current low freight rate environment,” said Ms Bartels. “But one of the biggest concerns owners are having are the evermore stringent environmental regulations.”
Choose the ‘wrong’ fuel could see a multi-million-dollar investment in a crude oil tanker become a stranded asset. The other uncomfortable statistic is that the tanker orderbook compared to the fleet is at its lowest level since 2015. The situation in the yards could actually be worse than shown on paper. Ms Bartels noted that approximately two-thirds of tankers scheduled for delivery in 2020 were not launched, due to Covid-19 and the difficulty in securing inspections.
“How will 2021 pan out? Poorly, if crude oil demand forecasts are any indication”
The result is a decline in the ratio of contracts-to-new fleet to below 10% for the three largest sectors, a situation not seen since the 1990s. Tanker fleet removals were also low in 2020, especially among the larger sizes. Currently, around 7% of the crude oil tanker fleet is 20 years old or older. Looking ahead to 2023, the figures jump significantly, especially among the Aframax tanker fleet.
How will 2021 pan out? Poorly, if crude oil demand forecasts are any indication. According to S&P Global Platts Analytics, demand for crude oil will recover by 6.3M b/d in 2021, but remain 2.4M b/d below 2019 levels as restrictions endure through the first half of 2021. OPEC+ continues to adjust crude oil supply to keep the crude oil price just below that required for profitable US shale oil operations.
Any incremental demand for crude oil is likely to be met from drawing down floating crude oil storage, increasing the available supply of large tankers and further dampening freight rates. Crude oil markets are predicted to remain mostly in backwardation across 2021, consistent with pulling from surplus lower-cost storage onshore, according to Platts Analytics.
Looking at the near-term outlook for the tanker market, BIMCO’s chief shipping analyst, Peter Sand, said: “Oil tankers are looking at a slow, uneven and unsteady recovery, as travel restrictions are once again tightened around the world, thanks to new virus mutations, even as vaccines are arriving. In the longer term, the change in oil trade patterns is likely to have a negative effect, as the strong growth in US exports is unlikely to return as long as crude oil prices remain in their current range.”