IMO 2020 is likely to lift the crude oil markets, increasing demand for deadweight over the coming year, according to Braemar Seascope’s Henry Curra
The demand for deadweight (the capacity of tankers required to service demand, excludes vessels in lay-up etc) is likely to grow by 6.4% in 2019. However, excluding the effect of IMO 2020, the projected demand for deadweight in 2020 is just 1.6% growth.
IMO 2020 is likely to impact the tanker market by increasing the trade of sweet and sour crudes around the globe, giving an uplift of 2.9% in 2020, and 0.7% in 2021. This gives a potential increase in demand for deadweight of 4.5% in 2020, according to Braemar Seascope.
Henry Curra (Braemar Seascope ACM): Expecting a hike in bunker prices from IMO 2020
On the supply-side, the change in fleet size is not particularly aggressive, except for the extra days in drydock for the retrofitting of scrubbers or cleaning of bunker tanks, to enable IMO-compliant fuel. “This will take capacity out of the market,” said Mr Curra.
“We note that the window for turning up for a drydock is being reduced from two or three weeks to a matter of days [and] we are already seeing vessels foregoing their spot cargoes in order not to miss their drydock dates,” explained Mr Curra.
“The larger-than-expected take up of scrubbers could narrow the price spread between compliant and high sulphur marine fuel, diminishing the returns built into the scrubber calculations”
“Therefore, the expense [of the scrubber] is not just the acquisition and fitment cost, but the loss of revenue from the unaccomplished spot voyages.”
He also queried the reality of bunkering small vessels equipped with scrubbers: “Will they be able to find high sulphur fuel oil in the smaller ports, where tank farm and barge capacity is limited? Will that not mean the bunker supplier will charge a premium delivered price for the available fuel, negating the advantage upon which the fitment of scrubbers was predicated?
“We estimate 124 VLCCs will be retrofitted with scrubbers in 2019 or 2020, and that is on top of the 50 newbuilding VLCCs that are due to be delivered with scrubbers.”
By mid-2020 a quarter of the VLCC fleet will be scrubber-equipped and realistically competing with the rest of the fleet. By mid-2020, a scrubber-fitted VLCC could be turning up in the Arabian Gulf and competing directly with other scrubber-fitted VLCCs. “I don’t think this scenario is fully priced in when assessing the fitment of scrubbers,” he said.
In the Suezmax fleet, Braemar Seascope estimates scrubber take up will be close to 20%. “This is not what IMO was expecting when the regulation was drafted,” notes Mr Curra.
The larger-than-expected take up of scrubbers could narrow the price spread between compliant and high sulphur marine fuel, diminishing the returns built into the scrubber calculations.
“We may have over-cooked it on the scrubber front,” said Mr Curra, who goes on to explain that Q2 2019 will be the low point of the VLCC market, with the combination of OPEC cuts and refinery maintenance dampening the market.
The effect of IMO 2020 will start in Q3 2019, with tankers going into drydock for scrubber retrofits; the effect will peak in Q4, taking significant supply out of the market.
There is also the impact of the emergence of another swing fleet joining the established LR2 fleet and moving from clean to dirty oil product trades. The LR2s are now looking to move back into clean to take advantage of the ‘IMO 2020 chaos’ scenario.
The new swing fleet is the “sheer number of uncoated newbuildings trading clean in the last 12 months,” said Mr Curra, noting “In some cases, four consecutive voyages, with one particular Suezmax moving clean products from South Korea into the Atlantic Basin.”
Turning to vessel scrapping, a unique situation is now developing in Mr Curra’s opinion, in that there is now a reasonable pool of scrapping candidates whose features are a relatively young age but high fuel consumption, meaning these tankers are less likely to be retrofitted with scrubbers (and ballast water treatment systems).
And then there is the issue of bunker prices: “We are expecting to see a hike in bunker prices from IMO 2020; even in a strong freight market (owners) might be incentivised to exit, especially if the vessel requires a ballast water treatment system.”
He continued: “It becomes a very difficult decision whether to trade on past a 15-year Special Survey or a 17-year Intermediate Survey.”
Given this scenario, Braemar Seascope only expects 12 VLCCs to be scrapped in 2019, rising to 23 in 2020.
“We are already seeing vessels foregoing their spot cargoes in order not to miss their drydock dates”
“We think this (tanker) market in going to be reasonably strong this year,” he said, noting that VLCCs could reach US$30,000/day as an annual average in 2019 and US$40,000/day in 2020.
This would be just about investment-grade rates according to Mr Curra, but these will soften quickly as the “natural release valve” opens when the delivery schedule tapers off and the shipyards start marketing available slots post-2020.
Rates remain firm
On the demand side, Mr Curra reported that it was very unusual to have an OPEC cut that did not weaken the VLCC freight rates. The reason for the relatively firm rates in the VLCC sector involves the increase in output from the US crude oil sector, supporting VLCC and Suezmax rates but also Aframax lightering in the US Gulf.
“Right now, refinery maintenance in the US is spitting out a lot of crude oil,” which explains the surge in US crude oil exports, said Mr Curra. Much of this is bound for Europe on VLCCs, which is displacing Brent crude oil, which is arbitraged to Asia, creating an overall increase in tanker ton-mile demand.
He explained this makes the Atlantic Basin a key market for tankers, covering the US, Canada, Brazil, Americas, and Venezuela. Should Venezuela return to the market, it would require VLCCs, and these would have to ballast from the Pacific. This is a big question mark for many owners, said Mr Curra – do they have the credit for the bunker purchase for such a voyage?
Furthermore, the Iran question remains to be answered, with the next US waiver date in May. This will impact the stream of new refineries in the East, some of which were predicated on a steady stream of Iranian crude oil. Braemar Seascope estimates 2.2m b/d of new capacity, much geared towards producing distillates.
- Henry Curra is global research analyst at Braemar Seascope