The first half of 2019 has failed to produce the spike in earnings predicted at the start of the year, but the tanker attacks in the Gulf may change that
The first half of 2019 has failed to produce the spike in earnings predicted at the start of the year, but the tanker attacks in the Gulf may change that, says Craig Jallal
The first half of 2019 has not progressed as I predicted... but then few predictions come true in the face of reality.
At the start of the year, I proposed five main events that would shape 2019:
As we reach the halfway point in 2019, the predicted logistical chaos (1) has yet to manifest. But then again, we have yet to be introduced to the compliant fuels that are going to be marketed by the oil majors. Therefore, we will not class that prediction as a failure, but one that has yet to fail.
The second prediction was focused on the unpredictability of Chinese oil demand. This unpredictability centres around the trade dispute between the world’s largest economies, the US and China, which in the last six months has gone from bad to worse. The US has applied tariffs and China has retaliated in kind. Notably, the Gulf of Oman and the Straits of Hormuz are where the US is applying much of the pressure on Chinese imports. The removal of Iranian crude oil from the market is a significant lever by which the US can rachet up pressure on China, its main trading partner.
The impact of US action is clear to see when comparing laden VLCCs sailing between Iran and China in the first six months of 2019 to the volume of imports in the first half of previous years:
The slack has been taken up by various suppliers, including Congo (H1 2018 = 0.7M tonnes equivalent, H1 2019 = 7.6M tonnes equivalent). And the action has not come without some pain for US crude oil suppliers. The US has seen laden VLCC sailings to China decline from 7.5M tonnes equivalent in H1 2018 to 2.5M tonnes equivalent.
In terms of the third prediction, the recent suspected attacks in the Middle East Gulf led to a spike in crude oil tanker earnings, but I cannot claim to have predicted this. My assessment was based on fundamentals rather than the short-term market response to the threat of trade disruption.
As such, spike is not quite the right word for this market response. Following the attack on two tankers in the Gulf of Oman, the daily earnings for VLCCs have, indeed, risen. In percentage terms the rises look very dramatic: VLCC rates from the Middle East Gulf to the UK rose by 725% in one week. But even that jump only got rates to US$2,600/day, according to Clarksons Research Services. Looking across the various VLCC routes, only the Caribbean to Singapore route could claim to be above breakeven at US$56,300/day over recent days.
With regards to mergers and consolidations, the most startling news in the first half of the year was the reshuffling at Navig8 Chemical Tankers. This is a story that many owners and operators will be watching with interest, if not some trepidation. And I expect more mergers and consolidations to come in the back half of the year, so watch this space.
Finally, the saga of the EU Regulation (EU) No 1257/2013 on Ship Recycling (EU SRR) continues to provoke those European operators with tankers nearing the end of their working lives. The EU has issued its fifth version of the list of approved of recycling yards, which in reality does not increase the probability of a VLCC being scrapped in Europe. In fact, the EU announced in June that it has opened legal proceeding against Croatia, Cyprus, Germany, Greece, Italy, Portugal, Romania, Slovenia and Sweden over their duty to fully implement European legislation on ship recycling. Of all my beginning of the year predictions, I feel most confident that this one will go the distance.
For further discussion of the predictions in 2019 and the prospects for 2020, book your place at the Tanker Shipping & Trade Conference, Awards & Exhibition in London in November 2019.