Will a recession sink the tanker market?

The downturn in the early 1990s happened after central banks raised interest rates to fight inflation in the late 1980s. The oil price shock following the Iraqi invasion of Kuwait made matters worse. Global oil demand bottomed out at 1.25M barrels per day (b/d) lower than at the start of the recession. The tanker market responded five months into the recession, when the US-led coalition of 35 countries started operation Desert Storm to expel Iraq from Kuwait.

The Asian financial crisis affected mainly Asian developing economies, while advanced economies were less impacted. The crisis started with a devaluation of the Thai currency and quickly spread to other Asian economies. However, the impact on global oil demand (and the tanker market) was limited; even Asian oil demand was not dramatically affected during the crisis.

The Tech crisis in the early 2000s was caused by a steep decline in the share prices of tech companies which had reached unreasonably high valuations. This was followed by the 9/11 terrorist attacks on the World Trade Center in New York. This crisis affected mainly developed economies such as the US and Japan while many developing economies continued to grow.

The global financial crisis in 2007/08 was triggered by a housing debt crisis in the US followed a liquidity crunch of several financial institutions. Due to the importance of the US financial system to the global financial infrastructure, the problems also spread to other countries. Global oil demand had declined by about 4.9M b/d 12 months after the start of the crisis. Surprisingly, tanker rates held up for a while after the peak of the crisis, but ultimately collapsed in 2009.

The most recent recession was also the worst for oil demand. As Covid spread around the world in early 2020, global oil demand collapsed by 15.8M b/d within weeks. Shipping rates initially skyrocketed as Saudi Arabia started a price war by increasing oil production, which, in combination with the demand destruction, led to record storage demand for tankers. When storage demand unwound, tanker rates fell and remained largely depressed until the Russian invasion of Ukraine in February 2022.

As the above descriptions show, the oil demand impact varies widely from one crisis to another. Most of the ’regular’ recessions have only had a limited impact on oil demand, with the Covid pandemic a clear outlier. It is likely that a potential future recession will again have a lesser impact on oil demand, with the caveat that long-term oil demand is more at risk now than in the past.

One important difference we see between these historical recessions and the current circumstances is the size of the orderbook. When a recession hits and oil demand declines, most of the ships in the orderbook continue to be delivered (with some cancelations or delays), adding extra stress to the supply-demand balance.

In 1990, the tanker orderbook stood at about 15% of the trading fleet; in July 1997 the orderbook was 12% of the fleet, growing to 15% in the following months. In 2001, the tanker fleet started to transition from single hull tankers to double hull. The orderbook started at 17% of the fleet and reached 21% in early 2002. During the global financial crisis, the orderbook reached a whopping 50% of the trading fleet in September 2008. This explains why it took the industry so long to recover. When Covid hit in early 2020, the orderbook was a modest 7.9% of the fleet.

The current orderbook is only about 4.7% of the fleet, the lowest level in many years. Nobody knows the exact impact of a potential global recession. However, it appears that the tanker market is better positioned to deal with the fallout than previously.

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