The main narrative in the East of Suez clean and dirty tanker markets during the third quarter continued to be the vessel supply-side dynamics with fresh tonnage entering the waters frequently.
While the glistening tankers crowd the market, the fast approaching winter months and the recent natural calamities that battered the Atlantic market are expected to drive up the demand for shipping crude and clean petroleum products during the fourth quarter.
DIRTY TANKERS: HELP FROM WEATHER ISSUES, CHANGING TRADE FLOWS
For most part of Q3, the unabated fleet growth kept the market bearish. Towards the tail end of this period the market showed signs of rebound in the VLCC segment.
The Asia VLCC freight rate on the key PG-Japan route jumped by 10 Worldscale points over three trading days to touch the psychological w50 level on September 25. Since then rates have continued to push higher and have currently broken through the w60 mark, S&P Global Platts data showed.
The increase in the trading volumes on the West Africa to East as well as the pick-up in US crude exports to the Far East boosted owners’ sentiment. The pick-up in the Atlantic to Far East crude voyages helped keep the Persian Gulf vessel availability list slim and thereby offering owners the liberty to pitch for higher rates.
VLCC time charter equivalent earnings have finally moved above operating expenses for owners, according to market watchers. For a Persian Gulf to Far East voyage at w50, owners are looking at around $13,000-$14,000/day levels. A month ago, the earnings were between $6,000/day and $9,000/day when rates were in the w30s to w40s range.
“Overall VLCC tonnage is still a lot, so I am not sure how long this can go on. But we must make hay while the sun still shines. Going into November [which is start of the winter season], sentiment is pushing up,” said a source with a VLCC ship-owning company. The source cautioned that if the charterers are able to use compromised tonnage, which lack necessary approvals, the rates could stagnate.
The Aframax market in Asia made a surprise rebound with rates rising from the year’s low to almost the year’s high, propelled by a flurry of activity in the Indonesia region during the tail end of September.
The key Indonesia-Australia 80,000 mt assessment climbed from w88 at the start of September to a seven-month high of w140 on September 21.
Demand for regional crude and fuel oil cargoes coupled with weather-related delays in China and various ports in Northeast Asia trimmed vessel supply and caused replacement jobs. Since the start of October, that Aframax segment has started shedding points as vessels returned to the market after the delays.
“There has been a lot more scrapping this year than many expected [in the Aframax segment] as rates have been low. Also, traders may want to unwind some positions and sell their cargoes in storage, so ships may see more voyages from that,” an Aframax shipowner source said, adding that caution should be exhibited in expecting the market to touch a sustainable earnings level of $20,000/day in the Aframax segment.
The Suezmax market in the region was mainly getting support from the Aframax market with some charterers picking up the bigger vessel when Aframax freight levels spike.
CLEAN TANKERS: AMERICAS CAME TO THE RESCUE
The East of Suez clean oil tankers’ rates are likely to see fresh highs for 2017 in Q4 as the market works the strong demand to its advantage. Though there was fresh injection of supply almost every week during this year, a host of tragedies, including the devastating storms in the Americas have provided support for the clean tanker market in Asia.
The increase in the cross-continental trips due to calamity-induced demand spike resulted in ships travelling longer distances and earning more for a longer duration, in what is called the ton-mile demand.
Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same or conversely, it offsets the increase in supply of tonnage.
In the last five years, the ton miles for clean MR and LR tankers increased by more than a third each to around 2.7 trillion and 1.9 trillion respectively in 2016, said William Bennett, lead trade analyst with VesselsValue, a UK-based shipping consultancy.
“Overall the oil demand will hit an all-time high in the current quarter. A lot of demand will be catered to by the crude and oil product stocks worldwide,” said Peter Sand, the Copenhagen-based chief shipping analyst with Bimco.
While the supply increases, the pace at which it is rising has slowed down. So far this year there have been slightly fewer new buildings compared with 2016.
In the first eight months of 2017, an average of 13 product tankers were delivered each month, comprising eight MRs and five LRs, according to data from Genoa-based shipping consultancy and brokerage, Banchero Costa. The corresponding figure last year was 16 ships comprising 11 MRs and five LRs, the data showed.
VesselsValue has projected a growth of 3%-4% in the fleet of MRs and LRs next year, on the top of 4% and 10% respectively that is likely for this year, said Bennett.
“The fourth quarter traditionally sees fewer deliveries than the previous quarters,” said Ralph Leszczynski, Banchero Costa’s Singapore-based research director. Owners generally prefer to see ships slip from December to January, so that they can be labelled with the next year of built in the documents, which will enable it to have regulatory approvals for an additional period.
Around 40 product tankers are expected to be delivered during the September-December period including 25 MRs while the rest are LRs, Leszczynski said.
As a result, there will be a very high net fleet growth of at least 5% for the full year, compared with 2016, he said. Some of the analysts believe that this can weigh on the markets.
There will be spikes but rates will come down again at the end of the season, said Bimco’s Sand. “Growth in supply has been far too high for the demand to cope with and a poor fundamental balance always results in lower freight,” he noted.
The fourth quarter is typically the best performing one as demand increases during winter, said a source with a clean oil tankers’ owner.
Late last month, rate for the benchmark Persian Gulf-Japan LR1 route hit the year’s high of w152.5. The corresponding LR2 rates are also at their highest levels since early January. With some of the steam crackers substituting less LPG as feedstock to naphtha, demand for product tankers to move these cargoes is expected to remain strong.
“The market will fire through all the way,” said a chartering executive with an LR1 owner. Daily earnings for owners jumped to $18,000/day for LR1s on a round voyage on the Persian Gulf-Japan route last week, after being below $10,000/day for several of the previous months.