Celebrating Good Times: A Look Back At The Tanker Market

Clarksons

In 1980, the pop funk group Kool & the Gang sang “Celebrate Good Times” and since late 2014 tanker owners have been enjoying some rather good times. The fall in the oil price after the summer of 2014, coupled with the decision by OPEC to keep oil production at elevated levels has combined to support an improved tanker market, but just how good are these “good times” in a historical context?

Getting The Lowdown

Following OPEC’s decision to maintain production levels in the face of declining crude oil prices in November 2014, it became apparent that oil prices could remain low for a sustained period of time, whilst the volume of crude available for export remained high. Meanwhile, low oil prices supported refinery margins, notably in the OECD, which led to increased refinery activity driving up oil products trade, supporting product tanker demand. Overall, seaborne oil trade grew by 4.7% in 2015, the fastest rate since 2004. These trends, plus low bunker costs and limited fleet growth in the crude sector, meant that the stars aligned to support a significant improvement in the tanker market. Weighted tanker spot earnings surged to average $30,031/day between November 2014 and March 2016, compared to an average of $13,570/day in the period after the onset of the economic downturn up until October 2014.

Partying On Payday

Even comparing earnings over a longer period shows just how robust the market has been recently. Average earnings over the last 17 months were over double the average in the 1990s, when tanker spot earnings averaged $14,436/day, and were still above the average in 2000-03, $25,202/day, when the market started to improve. However, earnings over recent months have not matched the extraordinary earnings levels reached in the ‘boom’ years of 2004-08 when weighted tanker spot earnings averaged $39,432/day and VLCC average earnings topped $200,000/day, compared to a peak of just over $100,000/day in December 2015.

Expecting A Good Time?

The recent uptick in the market has also translated into an improved ratio between five year old and newbuild prices, a classic indicator of short-term market expectations. Between November 2015 and March 2016 the ratio for a VLCC and an MR averaged 84% and 76% respectively. This represents a marked improvement on the post-recession years when the 5yo/newbuild ratio averaged 72% for a VLCC and 75% for an MR, and is an increase compared to the ratio in the 1990s. However, while earnings in recent months have been higher than the average in 2000-03, the 5yo/newbuild ratio has typically been lower than in the early 2000s. This largely reflects the difference in sentiment between the two periods, with a more cautious outlook recently than in previous periods, potentially reflecting concerns over the large orderbook. Meanwhile, limited availability of finance has partially constrained the recent increase in asset prices.

So, although earnings and asset prices have softened so far in 2016, the tanker market currently remains healthy. Whilst the mood has been less bullish than during the ‘boom’ years, it is clear that in a wider context tanker owners have had plenty to celebrate since late 2014.

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Source: Clarksons

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