US shipping services company McQuilling Services has released its mid-year report on the status of the tanker market, and forecasts what lies ahead
The McQuilling Services Mid-Year Tanker Market Outlook Update provides an outlook on the global tanker market in the context of global economic growth and oil fundamentals influencing tanker demand and vessel supply. The outlook includes its view on future asset values, time charter rates, market freight rates and TCE revenues for 24 major tanker trades and four triangulated routes across eight vessel segments for H2 2019 through the remaining four years of the forecast period 2019-2023.
The methodology of the McQuilling Services rate forecast is based on evaluating historical and projected tonnage supply and demand fundamentals in the tanker market within the current and projected global economic environment, including oil supply and demand expectations. The forecasting process begins with developing quantitative models, which are used to measure the correlation between historical freight rates and tanker supply and demand. According to McQuilling Services, this fundamental approach has proven to be reasonably predictive over the past 22 years. It takes the forecasting process past the modelling stage as the quantitative results are balanced with experiential knowledge and reasonable market assessments. In 2019 year-to-date, the McQuilling Services forecasts from January are tracking within 8% of actual market levels.
McQuilling Services projections say spot market earnings for standard consumption VLCC tankers will average US$19,593/day in 2020. But the TD3C round-trip voyage will register only US$16,200/day as the higher cost of compliant bunkers outweighs McQuilling Services’ expected increase in the TD3C WS rate (2019 basis) from WS 53 in 2019 to WS 56 in 2020. This is because the return of tonnage supply from short-term outages (scrubber installations) creates significant pressure on freight rates in 2020 amid stable, but unexciting tonne-mile demand forecasts.
For Suezmaxes, McQuilling Services projects an average of WS 73 in 2020 for the benchmark TD 20 trade, before expanding to WS 93 by 2022. For a non-ECO Suezmax, McQuilling Services projections for spot market earnings over these years is US$10,800/day and US$27,300/day, respectively. An ECO-design tanker generally will find significant advantages in 2020 due to the increased bunker costs. An ECO-tanker is projected to average US$17,300/day and US$33,000/day on the TD20 round-trip trade over this same period.
In the Aframax sector, McQuilling Services expects earnings in the Mediterranean market to average US$11,700/day in 2020, slightly more than the benchmark TD8 voyage. The USG/UKC Aframax trade exhibits a slightly weaker earnings profile on a round-trip basis at US$9,400/day due to the pricing of potential back-haul voyages.
By 2022, McQuilling Services estimates that global Aframax earnings on a trade weighted basis to average US$26,200/day for a non-ECO design and US$29,900/day for an ECO-consumption vessel.
In the LR sector, McQuilling Services projects LR2 global earnings to average US$11,600/day in 2020, before growing to US$17,500/day by 2022. A relative outperformance for the LR1 tanker is projected, similar to 2019 actual levels with TCEs on the TC5 + Korea/Singapore triangulation voyage estimated at US$15,100/day in 2020 (non-ECO).
According to McQuilling Services, MR owners can expect slightly lower volatility in the earnings environment between 2019 and 2020 relative to other segments as the Atlantic Basin triangulation is projected to average US$12,900/day in 2019 and US$13,500/day in 2020. Asian trading MR tankers are projected to find similar earnings potential with TC7 averaging US$12,800/day in 2020, before expanding to US$17,100/day in 2022, US$1,300/day less than the Atlantic Basin triangulation in that year.
McQuilling Services notes that VLCC time charter rates (and spot market earnings) will be quite different depending on the profile of the ship, and this will be true for all tanker segments. McQuilling Services now have four different scenarios for VLCC earnings:
Using a McQuilling Services proprietary estimate of scrubber profit sharing between charterer and owner, it projects that in 2020 charterers will pay the following rates for 1-year time charterers using the four scenarios above:
Using the same scenarios, McQuilling Services project 1-year time charter rates for MR2 tankers in 2020 to be:
McQuilling Services projections of secondhand asset prices include expectations of volatility over the next few years. Prices for 10-year-old VLCC assets are projected to average US$45.5M, approximately US$20.0M below the price of a 5-year-old VLCC asset during the same period.
Prices for newbuildings are expected to inch higher to US$95.5M in 2020 before trending above US$100M by 2022.
In 2022, modern 5-year old VLCCs, Suezmaxes and Aframaxes are expected to average US$79.3M, US$54.8M and US$42.1M, respectively, a significant price increase from current levels.
On the clean side, McQuilling Services continues to beat the drum of the LR1 tanker provided its ability to generate the highest relative cash flow yield against current values than any of the other tanker segments we track. Despite the volatility in earnings next year, McQuilling Services projects the price of a 5-year-old LR1 will average US$33.0M in 2020, US$5.5M less than the LR2 sized tanker, a narrower differential than 2019.
MR2 newbuilding contracts (IMO II/III) are expected by McQuilling Services to average US$38.6M in 2020, about US$8.0M more than its projection for a 5-year-old MR2 tanker.
By 2022, McQuilling Services anticipate the price of the 5-year-old asset will reach US$34.0M, or US$10.9M more than the 10-year-old MR2 during this period.