Tonnage oversupply could play spoilsport for Asia’s tanker markets

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Tanker markets in the East of Suez could run into headwinds with more vessels expected to be placed on waters in 2017.

This segment passed the current year on a relatively unscathed note, while the global wet fleet saw 260 tankers of all categories — dirty and clean combined — delivered this year, which is highest since 2011.

Factors such as the OPEC and non-OPEC crude production cuts, uncertainties over the opening of arbitrage windows that could impact ton-mile demand, and possible volatility in bunker fuel prices could add to the woes of the tanker market next year.

DIRTY TANKERS

Asia’s VLCC, Suezmax and Aframax markets could see a weak opening into 2017 due to a well-stocked tonnage list following an influx of newbuildings.

Solace for shipowners could come from expected scrapping of vessels once the enforcement of ballast water treatment systems kicks in by September 2017.

Industry sources say 18% of the VLCC fleet would be over 15 years of age by 2016, 19% for Suezmaxes and 22% for Aframaxes by this year-end.

Meanwhile, the VLCC fleet has grown by about 6%, or 40 tankers, this year, and Suezmaxes by 5% or 22 tankers. Next year, the VLCC fleet is expected to see 47 new vessels with around 11 scrapping and the Suezmaxes could burgeon by 59 ships with 10 of them getting demolished, according to industry sources.

The striking effect could be that a major chunk of the newbuildings will be delivered in Q1 2017 — 23 for the VLCCs, and 24 for the Suezmaxes.

“It is unlikely that the market will be able to absorb this tonnage over a short time span, and while we are positive on the medium-term outlook for tankers, it still means H1 2017 looks a bit tough,” said Arctic Securities analyst Erik Stavseth.

OPEC’s production cut by 1.2 million b/d to around 32.5 million b/d from the start of January as well as a commitment from 11 non-OPEC producers to cut output by a combined 558,000 b/d is expected to dampen the market.

“There is a clear risk that OPEC cuts out of Middle East will lead to lower ton-miles before a potential lift if West African barrels start flowing to India and the Far East,” Stavseth said.

With Saudi Arabia stating it wants to maintain volumes to Asian buyers, there may not be much incremental volume left for West African barrels, Stavseth said.

“This again means West African barrels could end up staying in the Atlantic, [and] not making the long-haul journey East,” he said.

The Suezmax segment may see demand coming from US crude exports, if it happens to increase in 2017.

The Asia Aframax market is heading into 2017 on a dreary note, as the seasonal uptick in Q4 died out following an injection of Aframax vessels with coated tanks switching from the clean petroleum product market to the dirty petroleum product market.

Around 10-15 such additions occurred in November and early December, adding to the long list of Aframaxes trading in the dirty market.

A total of 77 Aframax-type tankers are scheduled to enter in 2017 with only seven scrapping projected, while 35 out of the 77 vessels are expected to trade in the dirty segment, market sources said.

CLEAN TANKERS

The tonnage supply pressure implies that product tankers are bracing for another round of struggle in 2017.

The economic slowdown and pallid naphtha demand from Japan’s petrochemical sector, greater preference for LPG as a substitute and an increase in China’s domestic naphtha production are all translating into a slower-than-expected growth in naphtha imports, which may weaken the LR tanker market. China’s naphtha output grew 2.2% year on year to 2.77 million mt in November, according to official data.

Support for Q1 2017 may come from several LR2 tankers being taken in December on short-term time charter of up to 90 days for gasoil storage around Singapore by Glencore, BP and Vitol for possible contango play.

More than two dozen LR2s have switched to the dirty market this year to cash in on higher earnings, which at one point hit almost $25,000/day in December on the key Aframax Indonesia-Japan dirty tanker route.

Any incremental shift towards the dirty market would further cut LR supply.

“Due to the longer period necessary for a reverse switch back to the clean market, that is surely positive news for the other vessels that remained clean,” says Luigi Bruzzone, a Genoa-based research analyst with Italian brokerage and consultancy Banchero Costa.

On the delivery side, at least 18 LR2 ships will be delivered in the first half of 2017 — a 5.5% growth in fleet which poses some challenges, says Stavseth. Banchero Costa has forecast a 16% growth in the LR2 fleet next year.

The actual gross inflow looks more like 7.5% before scrapping takes its toll, according to Baltic and International Maritime Council, or BIMCO.

A major positive impact from scrapping of LR2s is not expected because only eight among them globally are more than 20 years old, according to BIMCO’s chief shipping analyst Peter Sand.

The orderbook for LR1s is equivalent to 11% of the global fleet, with 7.5% of the deliveries in next year, according to Banchero Costa.

A strong freight market in 2015 was created by an increase in throughput at global refineries, causing up-front oil demand to run ahead of end-consumption, says BIMCO’s Sand.

In 2016, the oil product tanker fleet is expected to have grown by 6%, according to BIMCO’s estimates.

This has unbalanced the market because growth in demand has eased off, and this could pose challenges in 2017.

The newly placed orders for MR tankers — considered the warhorse of the clean wet market — is equivalent to around 10% of the global fleet of nearly 1,600 MR tankers, according to industry estimates. More than 100 ships in the category have been either delivered or were scheduled to be delivered this year.

While key trading countries in North Asia, such as South Korea, have seen their product exports come under pressure, the turning of China into a net exporter of oil products will next year see more clean MRs deployed at the Chinese ports.

China exported almost 43 million mt of oil products during January-November, up 35% from the same period last year, according to customs data.

Source: Platts

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