It is likely that 2018 will go down as one of the slower years for the tanker markets, but the 2020 global sulphur cap could be the disruptor the market needs
During the northern hemisphere’s summer there tends not to be a great deal of action in the tanker markets. This is partly due to upstream factors, such as maintenance in the North Sea and other offshore areas closing production while operators take advantage of the relatively benign weather to tackle refits and upgrades.
With less product available, the knock-on effect is a slowdown in crude oil exports, a fall in tanker demand and an opportunity for refineries to shut down and undertake maintenance and upgrades themselves. September is when the maintenance schedules come to an end and the tanker market begins to pick up, as stockpiling commences.
However, this year we are seeing crude oil tanker rates, and therefore earnings, continue far below the long-term means and medians well into the latter part of the year. Clarkson Research Services (CRS) report that VLCC average spot earnings to the end of August have only reached US$6,700/day; in May spot earnings dipped to an average of US$3,200/day. Even the better than-expected spot earnings of US$11,200/day in August is unremarkable compared to the average of US$17,800/day in 2017, and a profitable US$41,500/day in 2016.
On the positive side, CRS reports that active VLCC fleet growth in 2018 could be marginally negative, if demolition continues at the current pace. This chimes with forecasts at the start of the year – by among others former CRS analyst and now Teekay Tankers head of research Christian Waldegrave - which flagged Thanksgiving Day as the balance point.
CRS is now projecting VLCC fleet growth of 4.5% in 2019, approximately the same as its current demand growth projection.
As reported in Contracts and Completions, there were no VLCC newbuilding contracts placed in July or August, and so this year additions to the VLCC fleet have been on par with deletions.
Falling crude oil output from Iran and Venezuela is being more that met by increases from the US shale oil fields. The IEA reports that US shale oil production increased 30% year-on-year and there are several developments to boost crude oil exports by VLCC. However, the rise of US exports does not replace long-haul imports and ton mile demand continues to decline. CRS projects that seaborne crude oil demand will see 1.2% growth for full year 2018, the lowest for three years.
Looking ahead, there is a huge one-off variable that could change all forecasts. To date, most of the discussion about the 2020 global sulphur cap has been focused on the shipping industry. But there are an increasing number of articles in the commodity press projecting an increase in freight rates. The increase in awareness is a positive step, as are the projections from the oil majors and refinery operators on how they are going to meet demand for compliant fuels. By all accounts, the changeover will occur as early as the beginning of 2019, as refineries run down stocks of high sulphur fuel and adapt to producing low sulphur fuel.
According to a presentation given by Fearnleys senior oil & tankers analyst Dag Kilen at the 11th Annual Capital Link Shipping & Marine Services Forum in London in September, a survey of nearly 100 owners found expectations of delay in implementing the global sulphur cap, with many suggesting a lack of available ships with scrubbers would allow the shipping industry to pass the cost onto the charterers.
A similar survey among charterers found that those involved in the oil industry as traders or oil majors had already time-chartered scrubber-fitted vessels, or had taken the step of securing other suitable tonnage. As industry insiders, traders are aware of the physical capacity of the refining industry to produce compliant fuels.
From the perspective of the tanker market, this is both good and bad news. Disruption and displacement of demand is always good for tanker rates. Unless of course, the owner/operator is unable to take advantage due to an inadequately-equipped vessel or having locked in to a long-term charter in a soaring spot market.