VLCC earnings fell to levels not seen since 1994 in 2018. But while many of the same geopolitical drivers continue to impact the crude oil price, IMO 2020 has the potential to kickstart a turnaround in fortunes
VLCC earnings fell to levels not seen since 1994 in 2018. But while many of the same geopolitical drivers continue to impact the crude oil price, IMO 2020 has the potential to kickstart a turnaround in fortunes
From the helicopter viewpoint afforded by Kuehne + Nagel’s (N+K) world trade index, 2018 was a good year. Despite trade wars triggering new tariffs, the N+K world trade indicator increased by 9.5% (measured in nominal US$), almost at the same pace as 2017 (+9.7%), and remarkably higher than either 2016 (-3.3%) or 2015 (-9.3%).
This healthy increase in world trade translated into a small increase in tanker activity. According to VesselsValue, the overall tanker ton-mile increased by 1% year-on-year in 2018.
But despite the rise in ton-miles, the tanker industry will look back on 2018 as something of an annus horribilis. Clarkson Research Services reports that in 2018, average VLCC earnings stood at just US$15,561/day, the lowest level since 1994. Fortunate then that the final quarter of 2018 did not go the way of 2017, when the expected seasonal uplift failed to appear. Instead, December 2018 witnessed a much needed growth in rates in VLCC earnings, to US$40,938/day, while average weighted earnings across all tanker sectors were only down by -3.8%. This uplift was forecast as early as March 2018 by Teekay’s director of research and commercial performance, Christian Waldegrave.
Christian Waldegrave (Teekay): Made an early (and correct) call on late-year growth in VLCC earnings
Last year, the crude oil tanker market was shaped by the ebb and flow of the crude oil price. Speaking at the Marine Money London Ship Finance Forum in January 2019, Rystad Energy partner Markus Naevestad highlighted the drivers behind the crude oil price in 2018 and explained why they still influence the price.
In March 2018, the OECD commercial oil stocks fell below the five-year average, which in Mr Naevestad’s opinion “was a signal to OPEC to start producing more crude oil”.
This was followed in May by the re-imposition of US sanctions on Iran, which spooked the market, despite not coming into play until later in the year. June 2018 witnessed OPEC increasing crude oil production, prompting expectation that the US would cut its crude oil production.
But in October 2018, the EIA announced US crude oil production and stocks had reached an all-time high, a development followed by Saudi Arabia’s announcement that it too had increased production, with the combined impact of an extra 2M b/d into the market. Together with the OPEC+ cuts in December falling short of market expectations, these factors all helped push the crude oil price to US$50 bbl, according to Mr Naevestad.
Considering the impact of US sanctions on Iran, IMO 2020 fuel demand and increased refinery capacity, Rystad Energy projects that the Brent crude oil price will hover in the range of US$60 to US$70/bbl, with a finite price of US$65/bbl in 2019 and US$70/bbl in 2020.
“Despite the rise in ton-miles, the tanker industry will look back on 2018 as something of an annus horribilis”
Elsewhere, Maritime Strategies International (MSI) managing director, Dr Adam Kent, predicts a slew of changes impacting the tanker market in 2019 and beyond, not all of which are connected with the sulphur cap.
He believes the US is “winning the tug of war” on oil production between OPEC, the Middle East, the US and the Americas. US crude production is growing faster than that in the Middle Eastern and MSI projects that by 2022, crude oil production from the US and the Americas will account for 28% of global exports.
This will be a boost to ton-mile demand and the tanker market as a whole, but the location of the refineries is also crucial, according to Dr Kent. This year should be a record one for new refineries, mostly in the Middle East, southeast Asia and India.
Policy matters
“Policy is now one of the issues that the industry has to deal with which could dislocate momentum on the upward path of the cycle,” explained Dr Kent. In the tanker sector, ‘policy’ includes OPEC actions and in the longer term, the impact of environmental regulation, notably the 2020 sulphur cap. This should be good news for product tanker trades, as new refineries are mainly being built in the Middle East and the Far East, but the marine fuel is required globally. Arctic Securities has forecast earnings of around $20,000/day and $17,000/day this year for LR2s and MRs, respectively.
MSI has noted that Suezmax and even VLCC newbuildings are making maiden voyages carrying petroleum products from southeast Asia to the West. According to MSI, in one case a newly delivered Suezmax made four consecutive clean petroleum product voyages.
According to VesselsValue, there are 87 VLCCs and Suezmax tankers due for delivery by the end of 2019. These have the potential to be disruptive to product tankers, by carrying clean petroleum products on their first voyage or subsequent voyages. Our analysis suggests that the sulphur cap on marine fuel may not prove quite the bonanza the product tanker sector was expecting.
The outlook for the tanker markets will always hinge on geopolitical factors, and in 2019 these will include trade protectionism in the US and China, the continuation of the re-imposition of US sanctions on Iran and the recent extension of sanctions on Venezuela. On the positive side, China is set to raise crude import quotas for its independent refiners by 42% this year, according to Platts.
Clarkson Research Services projects VLCC dwt demand will expand by 4.9% in 2019, largely driven by growth in long-haul exports from the Atlantic to Asia. However, this may be balanced out by a 4.9% growth in the ‘trading’ VLCC fleet.
On the product tanker side, the projection is that growth demand will expand by 3.5%, with Clarkson Research Services seeing potential support in 2019 from the return of arbitrage flows to Asia, robust Mexican imports, and growth in exports from the Middle East and Asia.
The outlook for supply growth is slightly smaller at 2.9% in 2019. Clarkson Research Services expects the IMO 2020 sulphur cap to act as a catalyst for product tanker trade and expects the movement of gasoil will drive growth in inter-regional trades and between the US and Asia. Any decline in fuel oil trade is expected to be spread across crude oil tanker and product tankers.
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