Tanker shipping: Tough year ahead as virus mutations & slow vaccine rollout hampers recovery

tanker

After a turbulent year, low demand looks set to plague the market in the coming months combined with too many ships fighting for too few cargoes in both the crude oil and oil product segments

Demand drivers and freight rates

The realities of the pandemic are setting in for the tanker market.The record-breaking Q2 2020 is a distant memory and,instead,the market faces a slow recovery with low demand, stock drawdowns in consuming countries (with products already where they need to be and therefore not being transported by sea) and loss-making rates.

Perhaps the most notable example of this is on the benchmark Middle East Gulf to China trade where earnings(voyage revenue –voyage costs)have fallen from USD 250,354 per day in mid-March 2020to USD -1,056 per day on 15 February; voyage revenues are so low they no longer cover voyage costs, let alone operating and financing costs.

Average earnings for the whole market are slightly better at USD 3,416per day for a Very Large Crude Carrier (VLCC)on 12February. But they are still far from what BIMCO estimates is needed to breakeven (USD 25,000 per day). Similarly,rates for Suezmax and Aframax crude oil tankers are far from their estimated breakeven point, earning just USD 8,767per day and USD 3,803per day respectively.One-year time charter rates are also failing to breakeven, meaning that some owners fixing ships on these now are accepting daily losses of a few thousand dollars for the next year.Only a few ships are taking these long-term loss-making rates, and are doing so simply because owners and operators believe this will minimise their losses,and that a year on the spot market will lead to bigger cuts to income.

Oil product tanker earnings are also stuck far below breakeven levels. So far this year,an LR2 has seen average earnings of just USD 4,201per day. Handysize ships have been the best performing product tankers though,with average earnings of USD 5964 per day, there is little reason to celebrate.

When it comes to cargo demand, oil products were hit in different ways by the crisis; while some are already recovering, others have yet to see any meaningful upturn.Total EU seaborne imports of oil products ended2020down by 19.6%, with fuel oil performing the worst, plummeting 53.8% year on year. At the other end of the scale, gasoline imports–accounting for 10.9% of EU seaborne oil product imports–rose 5.1% to 17.4m tonnes. At almost half of total imports, gas oil imports fell to 77.7m tonnes (-11.4%).

Unlike in Europe,Chinese refinery throughput was quick to rebound from its fall at the start of the pandemic, ending the year up 3%, with December seeing a record high throughput of 60m tonnes. Domestic demand fuelled this recovery, as exports of refined oil products fell by 7.5%. Over the year, Chinese crude oil imports rose by 7.3%, slightly down from the 10% growth in imports in both 2018 and 2019, but still considerably outperforming the rest of the world.

Towering above the total growth rate of 7.3%, Chinese crude oil imports from the US rose by 211.3%in 2020 compared with 2019, as Phase One of the US-China trade agreement meant an extra 13.4m tonnes of crude oil being sent across the world. Over the year,Chinese imports totalled 19.8m tonnes, leaving the US as the ninth biggest exporter of crude oil to China. This list is dominated by Saudi Arabia and Russia from where China imported 84.9m tonnes and 83.6m tonnes,respectively.The two provide 31.1% of all Chinese crude oil imports.

In total, US crude oil exports rose by 6.3% in 2018, continuing the upward trend that began once the ban on crude oil exports was lifted at the end of 2015. This is a marked slowdown from the 52.5% growth in 2019 and 95.3% in 2020.Tonne per mile growth outperformed that of tonnes, coming in at 11.1%, as higher exports to Asia boosted sailing distances.

The many years of strong growth in US crude oil exports has provided much-needed demand for tanker shipping. This is especially the case when considering the much longer sailing distances between the US and the Far East–the largest import market–compared with that between the Middle East and Far East.

Following the shocks of the past year,there are worrying clouds on the horizon for US crude oil exports. The country has higher production costs compared with the world’s other dominant producers,and2020 has squeezed profit margins and investment. Oil-producing rigs in the US numbered 306 in mid-February–372fewer than a year earlier (source: Baker Hughes). This will limit growth in US crude production in coming years, especially if the oil price fails to rise further. That said,US crude oil production has not fallen by as much as the drop in number of rigs would suggest;average quality has increased, given that the worst-performing rigs are the first to be closed.

Refineries are also having a hard time,as new lockdowns in Europe and global travel restrictions put a further recovery in global oil demand on hold. Average US refinery throughput in January was down 11.5% compared with January 2020,at 14.6m barrels per day. At 82.3% at the end of January, US refinery use has recovered from its lows in the high60s, but remains below its pre-pandemic level. Demand and margins remain depressed, and refineries that may only have been temporarily shut at the start of the pandemic, are now closing permanently,affecting the demand for crude oil inputs.

US oil product export, which in some weeks at the end of 2020 were above levels in the same period of 2019, have begun the year5.5% lower than in 2020but are still up 2.1% from the start of 2019.

The recovery in US demand for oil products has been mixed because restrictions affect elements of demand in different ways. Petroleum product supplied was down by 11% in the last week of January 2021, compared with the same week in 2020. Gasoline was down 13%, and jet fuel fell 54.7%, after an uptick in the number of flight passengers over the holiday season came to an end. On 7 February, daily US flight passenger numbers were down by 62.4%compared with 2020.

Fleet news

At 2.5%, the oil product tanker fleet growth expected by BIMCO is on par with the 2.4% increase in the market experienced in 2020. Crude oil tanker fleet growth is expected to decline from 3.3% in 2020 to 1.5% in 2021, closing in on its low point of 0.9% advance in 2018.

So far this year, 26crude oil tankers have been delivered, totalling 3.7m dead weight tonnes (DWT), along with 16oil product tankers with a combined capacity of 1.1mDWT. Over the year, BIMCO expects oil product tanker deliveries to reach 5.7m DWT, and crude oil tanker completions to fall from 18.7m DWT last year to 14.2m DWT this year.

Source: BIMCO

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