Could pipelines drink the tanker market’s lunch?
The world is not about to witness the imminent decline of oil demand, but there are other structural factors impacting tanker demand, writes Tim Smith, director, oil and tanker markets at Maritime Strategies International (MSI).
Broad-based macroeconomic expansion and benign economic conditions are supporting oil demand growth, including areas dominated by OECD countries such as North America and Europe. Despite some deceleration from 2017 rates of growth (of 1.6%), MSI expects global oil demand in 2018 to increase at a respectable 1.4% - a modest upward revision from our previous forecast.
Rate of expansion slowing
However, MSI continues to expect the trajectory of global growth to be downwards. To be clear, this does not mean oil demand will decline across the five-year horizon, rather that the rate of expansion will slow. There are of course risks to this view, in particular a downside macroeconomic shock or a sharp spike in oil prices could dramatically reduce the growth forecast.
Fuel substitution (such as electrification of vehicles, LNG bunkering, etc) is expected to play a part in reducing oil consumption, but given the base level of effectively zero that these technologies are coming from, their effect over the five-year horizon will be limited, even with rapid adoption rates.
Efficiency of oil-based engines will also play a part in reducing oil demand growth per unit GDP. Alongside this, higher oil prices per our revised forecast, and the waning macroeconomic cycle post-2019, also feed into the view that growth rates will drop towards and then below 1%.
Oil’s demise exaggerated
However, this forecast does not reinforce the idea that we are about to witness the imminent decline of absolute oil demand as a result of some of the factors mentioned above. In general, forecasting agencies (including MSI) tend to underestimate oil demand, rather than overestimate it. It has been in OECD regions, like Europe, where this tendency has been most prevalent.
oFor example, the International Energy Agency (IEA), for many the global reference on oil market dynamics, produces a five-year forecast once per year covering its expectations for oil demand. MSI has looked at the track record of these forecasts, particularly for Europe, where it has been perennially bearish. The chart titled IEA forecast for OECD Europe oil, shows the IEA’s forecast for OECD Europe for every year from 2011 to that made around Q1 last year. It also shows its most recent forecast from its monthly oil market report.
The red line effectively shows the actual history and the IEA’s most recent short-term estimates for 2018. Between 2014 and 2017, OECD Europe’s oil demand expanded by 6%. This development sits in stark contrast to the perennially bearish forecasts of the IEA.
As a forecasting agency, MSI is aware of the difficulty in predicting the future. However, it is crucial to look at the track record. What is clear here is the error is consistently on the downside, rather than distributed symmetrically around the actual value. In fact, no forecast even comes close to 2017 levels, and even more recent forecasts, such as 2015, underestimate volumes two years out by more than 1M b/d, or 8%.
As a result, MSI is cautious of being too bearish on oil demand, despite the drumbeat narrative of efficiency and electrification which dominates discussion about the longer-term future for oil.
In January this year, total Russian crude production was almost flat month-on-month, totalling 46.3M tonnes. Nonetheless, Transneft, Russia's pipeline operator, stated that Russia's seaborne crude shipments to Europe will fall sharply this year.
The reason being that loadings from key Baltic outlets, Primorsk and Ust- Luga, are expected to fall as Urals exports are diverted to pipeline routes to the east, principally China. Black Sea exports from Novorossiysk are also forecast to fall, whilst volumes going east via the Eastern Siberia Pacific Ocean pipeline and Kazakhstan will increase by just over 10M tonnes to 38.3M tonnes. This development goes to the heart of crude trade and tanker demand.
Whilst there are very promising developments for long-haul trade from the Americas to Asia, seaborne trade growth itself is being curbed by overland trade. Deadweight demand is therefore growing fast, but from a lower base than it would without the influence of pipelines.
Growth in pipelines
The chart titled Overland vs seaborne crude shows global crude trade flows, split by overland and seaborne, with the red line denoting the relative proportion of overland. Until 2010, overland crude flows were effectively static, but, relating back to the wide-ranging influence the shale boom had from around this point, things have changed.
Heavy Canadian crude being shipped down to the US Gulf Coast has been a major driver in recent years, as Canadian output has grown. Further large increases beyond 2020 are likely, assuming the Keystone XL expansion goes ahead, although this is subject to ongoing negotiations. In the near-term though, the increase will consist of FSU crude moving to China, and this is bad news for tankers as it is a direct substitution for their employment.
On the flipside, MSI does expect deadweight demand growth to benefit from increased tonne-miles. The obvious example here is US crude to Asia. This has seen very strong growth to countries such as China and Singapore. However, MSI also views the reorientation of other ‘Atlantic’ crude sources east as a major support to distance trades.
There is an expectation that both European and North American crude imports will drop. Therefore, even if production levels in regions such as Latin America and Africa do not see major growth, their crude is likely to be redistributed further afield.
Americas to Asia tonne-miles hope
With limited refinery capacity growth (after the Brazil corruption scandals put paid to major expansion in Brazil) Latin America is a major candidate to support tonne-miles.
The chart Crude oil demand versus deadweight shows the global growth rates of various measures of crude transport demand. MSI expects seaborne crude trade growth to underperform total crude trade growth as a result of rising overland trade. However, tanker deadweight demand growth will overperform seaborne trade as long-haul routes, particularly from the Americas to Asia, continue to expand.