Tanker shipping: Sky high freight rates replaced by reality of falling global oil demand


Geopolitical tensions have now eased, leaving freight rates to feel the full effects of the weak underlying market and falling demand. Tanker shipping looks set to be under pressure for the rest of the year.

Demand drivers and freight rates

The tanker shipping industry was once again caught in a whirlwind, as freight rates skyrocketed with little regard to the poor market fundamentals before the latter once again caught up with rates. Geopolitics continues to dominate the headlines when it comes to the tanker market, and developments in the supply of oil overshadow the steep drop in demand caused by the Covid-19 crisis. Floating storage has also increased primarily due to the mismatch between oil production and oil demand, tightening tonnage availability in the market and further supporting freight rates.

This drop in demand is illustrated by the collapse in oil products being supplied in the US: gasoline fell by 37.7% from 3 January to 3 April, a loss of 3.1 million barrels per day (bpd), but has since recovered some of that lost supply and, as of 15 May, stands at 6.8m bpd (down 16.5% from 3 January). The supply of jet fuel has fallen by 62.5% since the start of the year, standing at 0.6m bpd on 15 May (down from 1.6m bpd on 3 January).


April was certainly a month to remember, with the biggest oil-producing nations setting off a price war and flooding the market with millions of extra barrels each day – at the same time as demand was collapsing.

The OPEC+ (an expanded alliance of countries collaborating to control the world production of crude oil) production cut that was eventually agreed, and has now come into force is, however, still not enough to balance the oil market after lockdown measures around the world cut demand for all oil products.

The chartering spree from Saudi Arabia, as it prepared to flood the market with its cheap oil in April, led average Very Large Crude Carrier (VLCC) earnings to soar to USD 279,259 per day on 13 March, with rates staying high until the end of April. However, since then, as oil production has been cut and the reality of an oversaturated market hit home, rates have dropped to USD 42,547 per day on 22 May. Rates will continue to fall, as the global economy is unable to provide the demand needed to keep them elevated.


As is often the case, rates for the smaller crude oil tankers followed the paths of the VLCCs with Suezmax earnings peaking at USD 120,870 per day before falling to USD 30,992 on 22 May. Aframax earnings peaked later, reaching USD 83,921 per day on 24 April before falling to USD 26,959 per day on 22 May.

Oil product tanker rates saw a more restrained rise in earnings in March and April compared with their crude oil counterparts. But the sudden and unsustainable demand for crude tankers eventually led to earnings also spiking in the clean market, with LR2 earnings reaching USD 167,158 per day on 1 May and LR1 earnings hitting USD 114,370 dollars per day. They have since fallen to respectively USD 32,999 and USD 28,293 per day (22 May).

The dramatic increase in oil production in April, at the same time as demand collapsed, caused the oil price to tumble. The price of West Texas Intermediate (WTI) crude oil for delivery in May fell briefly into negative territory in late April as concerns over storage availability rattled the market – an unprecedented event. Following a sharp increase in storage since the end of March, US crude oil stocks have risen to their highest level since April 2017 at 532.2 million barrels at the start of May. Stocks in Cushing, Oklahoma, peaked at 65.5 million barrels on 1 May – around 86% of its working capacity and the highest level since May 2017.


The sudden drop in the price of crude oil because of higher supply and lower demand, left countries facing different prospects. Because of its low cost of production per barrel, Saudi Arabia is able to keep producing oil at a profitable rate, while other major producers with higher costs find themselves losing money at the current oil price (in April, Brent crude averaged USD 26.6 per barrel). The US Energy Information Administration (EIA) forecasts that, given the lower price, crude oil production in the US will fall by 4.1% in 2020 (to 11.7m bpd) from 2019 levels and decline a further 6.8% in 2021 (to 10.9 m bpd) from 2020 figures.

Increased production by Saudi Arabia is detrimental to US producers and is bad news for tanker shipping. Now the temporary jump in shipments out of Saudi Arabia has passed, demand for shipping will fall because of this trend, as the distance needed to be covered is much shorter. A trip to China from the Middle East is 5,800 nautical miles, whereas if the crude oil comes from the US Gulf, a ship must cover 15,000 nautical miles.

Crude oil imports to China for example were up 1.7% in the first four months of the year. Even though, under the “Phase One” of the US-China trade agreement, China has committed to increase its purchases of crude oil from the US, the imports from the US totalled only 0.4 million tonnes in Q1 – a 54% drop from Q1 2019. This means that, of the 39.2 million tonnes of crude the US exported in Q1 2020, only 1.1% has gone to China.

The realisation of the commitments made under the “Phase One” agreement become even more unacheivable when you consider the recent drop in the oil price. The extra volumes agreed upon for this year (+244%) and the next were based on 2017 export values, when the oil price was considerably higher. To match 2017 values, let alone exceed them by several billion dollars, exports by volume would have to rise by significantly more than the 244% growth needed in value. After the first quarter, exports of energy goods are down by 94% from Q1 2017. Read more about the trade war here.

Fleet news

Unsurprisingly, given the developments in the market, no tankers were demolished in April, with reductions in the total tanker fleet so far this year coming to only 0.6m DWT, down 63% from the same period last year. Of total tanker demolitions, 0.4m DWT were product tankers and the remaining 0.2m DWT crude oil tankers.

Source: BIMCO



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