Tanker shipping: markets under massive pressure from low demand growth

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BIMCO (largest of the international shipping associations representing shipowners) was surprised by the barely seen seasonality in tanker shipping where freight rates peak during the colder months in the Northern Hemisphere – from November to January. Loss-making freight rates across the board highlight the issues that the tanker industry is currently battling.  Overcapacity, weak ”trading demand” and weak OPEC output have depressed the conditions that usually boost long hauls.

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As illustrated by the very weak rates for oil product transports during most parts of 2017, the hardship extended losses into 2018.

For VLCC spot earnings, 2017 was the worst year since 1994. Average earnings of just USD 17,800 per day meant money was lost every day. Suezmax earnings averaged at USD 15,829 per day and Aframax at USD 13,873. The fact that China increased its importance in the oil market at the same time, generating a lot of tanker demand growth as it became the largest importer in 2017 (exceeding the US in April), freight rates remained dismally low.

China grew its imports by 10% (volume) in 2017, from the year before, and much of it was long haul imports. However, this boost to demand wasn’t enough for the overall market to improve.

This brings our attention back to the rebalancing of the global oil stocks, and to the question of what is the future ”right level” of global crude oil and oil product stocks going forward? Where’s the goal line? A return to the absolute stock levels of 1 July 2014, does not seem to be the target. Consumption rose from 93.9m bpd in mid-2014 to reach 99.3m bpd by December 2017. As consumption rise, stocks are likely to follow suit.

Stock levels are often measured by ”days of supply” – giving an indication that accumulated stocks equal to +1m bpd maybe one target point to watch out for.

According to the U.S. Energy Information Administration (EIA), the implied stock changes to the world liquid fuel balance in Q1-2018 show a drawdown of stocks, for the fifth consecutive quarter. Overall, stocks have piled up to an equivalent of 2.9m bpd since mid-2014, when crude oil prices started to decline rapidly. For 2018 and 2019, EIA forecast modest inventory (stocks) build up.

The drawdown of stocks is measured as a ‘flow’, i.e. the difference between oil production and oil consumption in million barrels per day (m bpd) and not as an absolute in million tonnes.

Since November 2016, when OPEC and non-OPEC producers agreed for the first time ever, to deliver a co-ordinated cut in oil supply, global stocks have declined. Despite that effort, stocks remain significantly above the level they were before oil prices started to drop, inspiring large-scale stockpiling during Q4-2014 to Q1-2016. The deal to cut oil output runs until the end of 2018.

So why is it that global stocks do not continue their decline? The short answer is because the US oil producers, who are not party to the supply cut agreement, are increasing their output from 9.3m bpd in 2017 to a forecast 10.3m bpd in 2018.  Output reached 10m bpd in November 2017. From an oil tanker perspective, the uncertainty surrounding global oil supply adds another layer of unpredictability to the market.

Regardless of the talk about alternative sources of energy – oil demand continues to grow. The International Energy Agency (IEA) forecasts global oil demand to grow by 1.3m bpd in 2018. Potentially breaking the 100m bpd barrier during Q4 2018.

Read full report here: BIMCO

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