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Spate of VLCC orders a worry


In what could be interpreted as a worrying trend, the total number of VLCCs ordered in the first six months of this year reached 38, compared to just 13 for the whole of 2016.

Around 20 were ordered in May and June alone, Gibson Shipbrokers, said in a recent report. There were also several owners considering ordering, either speculatively or as direct replacements for their older units. This VLCC ordering spurt prompted BIMCO to warn recently of a potential “fundamental imbalance that would take years to overcome.”

In addition, 16 Suezmaxes were ordered in 1H17, compared to 18 in the whole of 2016. aframax orders amounted to 35, thus far this year, compared to just six in the preceding 12 months, plus 12 LR2s - two in 2016.

Similarly, MR orders have already overtaken last year’s total of 30.

Almost half of all the orders this year were placed in June alone. Delivery dates indicated that only a few slots were available for late 2018 deliveries, suggesting that shipbuilders are rapidly filling their forward orderbook.

Price was still a driver, according to Gibson, but the influx of new orders has appeared to put a stop to the downward spiral of newbuilding prices seen recently.

Owners may also be betting on the potential recovery of the tanker market by placing orders for 2019/20 deliveries in anticipation of firming rates. The latest deliberations at the IMO on ballast water is unlikely to have any real impact on newbuilding orders unless tonnage is required to trade in US waters.

With the US regulators operating a different set of rules to the IMO, coupled with the Tier III requirements, some owners will be paying a higher newbuilding price to comply. The US authorities are seemingly toughening up ballast water waivers since they started approving systems. However, the IMO has agreed to extend the deadline, which could potentially lead to a slower pace of tanker scrapping in years ahead, Gibson said.

Perhaps the most interesting development in June was the announcement by Trafigura that it is to order up to 32 crude and product tankers, with a potential value in excess of $1.35 bill. Contracts were reported to have been placed by China’s Bank of Communications Financial Leasing against bareboat charters to Trafigura with purchase options.

Official confirmation of the initial 22 (Suezmaxes, aframaxes & MRs) split between Hyundai and new Times were sketchy by early July, as some of the finer details were undisclosed at the time of writing.

 

Order swap

Cido Shipping also seemed to favour the products market, having recently announced the swapping of an order for two car carriers to MRs. The two vessels involved were originally ordered in September, 2015 and as such, were not recorded as fresh orders.

The recent orders were placed by ‘blue chip companies’ who seemed to have access to huge credit lines or have been very creative with their funding. Lack of ‘easy money’ is something, which has kept a lid on ordering in the recent past, Gibson said.

Turning to the OPEC production cuts, Gibson said that they are having negative implications for crude tankers, particularly VLCCs.

Although no major changes have been seen in the absolute volume of spot VLCC fixtures out of the Middle East by the middle of July, this coupled with the ongoing rapid expansion of the trading fleet, forced spot earnings down to around $17,500 per day in recent months, from over $40,000 per day at the start of the year.
In contrast to the developments in the crude tanker segment, thus far the impact of production cuts on oil markets has been rather muted. Although global OECD oil stocks have moved to lower levels relative to the five-year averages, they still remain at highly elevated levels.

The biggest challenge to OPEC’s strategy is recovering US crude oil production. according to the EIa, US crude production averaged 9.2 mill barrels per day in June, up by over 0.65 mill barrels per day from the lows seen in September, 2016. Crude output is anticipated to rise by a further 0.55 mill barrels per day by December, 2017.

Recovering Libyan and Nigerian production were also diluting OPEC’s effort to rebalance the market. Last month Libyan output was assessed by the IEA at 0.82 mill barrels per day, up by nearly 0.55 mill barrels per day from the lows seen in August, 2016.

The latest indications for the country’s production are around 1 mill barrels per day, while the Libyan National Oil Corp targets a further 0.25 mill barrel per day gain to 1.25 mill barrels per year.

Gains in Nigerian crude output were also impressive. In June, production climbed to almost 1.6 mill barrels per day, a rise of around 0.45 mill barrels per day on August, 2016 levels.

If the relative stability in the country continues, further gains could be seen in the second half of this year, Gibson said.

The ongoing rebound in Libyan and Nigerian production has prompted discussions as to whether supply caps should be introduced for these countries, or alternatively, whether a flexible approach should be employed by other producers participating in output cuts to accommodate rising production from the exempt countries.


A question of cuts

However, both Libya and Nigeria indicated their unwillingness to introduce a cap, while further cuts would require a great deal of co­operation. Yet, if additional cuts are agreed and implemented, this will serve another blow to crude tanker demand this year.

An equally important question is what will happen in 2018 when the current deal expires? Gibson asked. Will we see a rebound in the Middle East crude exports, so much needed by the weak tanker market? The IEA expects to see a healthy growth in world oil demand at 1.4 mill barrels per day; however, further gains are projected in non-OPEC supply.

By far the biggest increase is anticipated in US oil production, which is forecast to rise year-on-year by 1.05 mill barrels per day. Smaller gains are also expected elsewhere, most notably in Brazil, Canada and the Uk, together accounting for a further 0.6 mill barrels per day increase.
Although output in a number of other countries is expected to see a minor decline, the overall picture is that all the predicted increase in demand is likely be met by increases in Non-OPEC supply (crude, NGLs, biofuels, processing gains).
No scope
If this forecast is correct, this leaves almost no scope for increases in OPEC crude output in 2018 from current levels. If OPEC decides to abandon its restraint, there is likely to be another build-up of global inventories and further downward pressure on oil prices.

The dilemma faced by OPEC does not inspire much optimism for the crude tanker market, hoping to see increases in Middle East crude exports. If production cuts are extended through 2018, the only hope for owners will be continued strong gains in long haul trade, persistent floating storage and slowing fleet growth, Gibson concluded. 

 

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