Koninklijke Vereniging - Société Royale



All eyes on oil market rebalancing – is it happening?

BIMCO’s analyst, Peter Sand, has taken one of his regular looks at the tanker market, analysing both demand and supply up to the beginning of September this year but before the devastating hurricanes hit the US Gulf and East Coast regions.

Demand is the one key factor to watch. However, the one thing that’s impossible to measure accurately on a global scale are oil stocks.

Global stocks for both crude oil and oil products rose significantly following the sharp fall in crude oil prices in the second half of 2014. But while this may seem to be in the past, it is still haunting the oil market and tanker market. Demand is currently below normal levels and will only increase once the global oil stocks have been reduced.

Tankers enjoyed above-normal demand as the stocks were building, but will continue to suffer as long as they remain high. The strong fleet growth in 2016 and 2017 only makes the downturn tougher on owners and operators struggling with stretched balance sheets, as earnings drop.

So, what is the right level of future oil stocks? It’s anyone’s guess now, but BIMCO believed that it is much lower than the estimates of the ‘money managers and bull traders’, but not as low as the level seen before the rise in 2014.

Global oil demand has grown markedly since then and it seems fair to strive towards a level equal to a given number of days of supply, rather than a multi-annual absolute average.

BIMCO believed that some rebalancing has taken place in recent months, but much more is needed. Data regarding OECD-stocks only provides an indication of how the market is developing in one part of the world. Likewise, any draw down on stocks in the US should not be used as a global proxy, as the US only holds 1/6th of OECD stocks.

Bearing in mind that if global stocks have a surplus of 180 mill barrels, it will take a whole year to reduce that at the rate of 0.5 mill barrels per day. The Energy Information Administration (EIA) has estimated that global liquid fuel stocks have risen by more than 1 mill barrels per day on average for six quarters in a row, that’s at least 540 mill barrels of stock stored.

Seaborne trade

The global tanker industry is directly linked to the global oil industry. Today, demand for seaborne oil transport is below normal and fleet growth is high, which means that the fundamental balance is uneven. The result is declining tanker earnings with the main culprit being the fast-growing fleet.

We tend to forget however, that demand is not that bad, Sand said. Looking beyond the regular draw on stocks, other demand factors remain strong. US gross input to petroleum refineries hit an all-time high in the week ending 26th May, when 17.7 mill barrels per day were refined (some of the refineries were badly hit by ‘Harvey’, thus increasing demand for refined products -Ed).

Global oil demand as forecast by IEA may pass the 100 mill barrels per day mark for the first time, hitting 100.1 mill barrels per day in 4Q18, and for 2017, growth has been revised up to 1.5 mill barrels per day. In addition, China is still believed to be increasing its strategic petroleum reserves (SPR) and crude oil imports were up by 13.8% year-on-year to the end of August, hitting 8.55 mill barrels per day on average.

Earnings for VLCCs in the spot market were as low as $8,775 per day, a level last seen during the difficult years of 2011-2013. The year-to-date (beg September) average stood at $20,489 per day. Based on a set of assumptions, BIMCO estimated that spot trading VLCCs built in 2005 and later are loss making at that level, because of heavy financing costs. Any profits made from older ships do not outweigh the losses of the younger vessels.

As earnings very often follow from one segment to the next, Suezmaxes and Aframaxes also suffered. Earnings for the product tanker sector on average appeared to have stopped falling, as they dropped steadily throughout 2016, reaching the mid-year level at the end of last year. BIMCO forecast that average earnings in this segment will also be loss-making.

MRs have earned no more than $10,040 per day, while Handysizes have dropped to $7,658 in 2017 down from $8,962 in 2016. LR1s have a year-to-date average of $7,873 and LR2s -$9,235 per day -there was a spike seen in earnings following the hurricanes but rates have softened again- Ed.

The tanker fleet is growing strongly. By the end of August, the crude oil tanker fleet had grown 4.3% year-to-date, and the oil product tanker fleet had grown by 3.6%.

Deliveries into the crude oil tanker fleet, included 36 VLCCs, 41 Suezmaxes and 23 Aframaxes, plus some Panamax and smaller units. The crude oil tanker fleet expansion remains on course for a six-year-high, measured in deadweight tonnage, however, the fleet growth percentage is down from last years’ 5.9%, to 4.7% for the full year of 2017.

Meanwhile, 23 LR2s, equal to 45% of the total added oil product tanker capacity overshadowed the recent years’ favourite - MRs - as ‘only’ 38 new ships were delivered during the first seven and a half months of this year. The fast-growing fleets come as no surprise. But the continued low levels of demolition in both tanker segments are a roadblock to changes to the current poor earnings environment in the freight market and a possible recovery.

The fact that one VLCC was reportedly sold for demolition in April, but was then subsequently sold to a new owner, one month later at a higher price, seemed irrational, as overcapacity is increasing amongst crude oil tankers in general and VLCCs in particular.

Product tankers

Turning to product tankers, just two LR2s left the fleet thus far in 2017, a year that saw MRs, almost exclusively being demolished.

BIMCO continued to believe that demolition will pick up during the final five months of 2017, but the actual demolition rate only amounted to one third of the forecast full year levels by mid-August. The ongoing poor freight market conditions will drive demolition, Sand said.

Over the last few months, shipyards have been busy signing new orders for tankers. Amongst them were 14 LR2s and 14 Suezmax ordered in June, supplementing the nine VLCC’s ordered in May. Up to mid-August, a total 32 VLCCs were ordered in 2017, up from 12 in the first quarter.

Assuming 2.5 mill dwt of product tanker capacity will be demolished; fleet growth will hit 4.1% in 2017. Should demolition fall short of that by 1 mill dwt, the fleet will expand by 4.8%.

Not a day goes by without a story about global oil stock levels. Many of them trying to be the messenger of positive news for the oil market and the tanker shipping market. However, sometimes business interests and wishful thinking are not supported by facts. Money managers and financial traders run businesses, which are very different from the shipping industry.




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