More pointers to a gradually stronger market
The tanker markets continue to be negatively affected by OPEC’s production cuts – but strong underlying demand for oil, a return to normal stock levels and increased scrapping all point to a turnaround. Overall, developments in recent weeks have strengthened our belief in a gradually stronger market from autumn 2018.
The tanker industry are currently in the trough of a business cycle. The fact that the market is weak – and has been for a long time – is largely due to OPEC’s reduced production and the withdrawals from stocks in the consuming countries that have been taking place since summer 2016. Overall, these two factors have resulted in reduced transport demand, which, in combination with extensive ship deliveries, has led to low freight rates.
Falling stock levels
OPEC’s production restrictions have seen oil prices rising from $45/barrel in summer 2017 to the current level of just over $70/barrel, an increase of about 50 percent. The big question is at what price and stock situation will OPEC (and its allies) give up the cuts and return to full production. Saudi Arabia has said it wants to see an oil price closer to $80/barrel. This is probably aimed at obtaining a better valuation for the planned IPO of part of its oil company Aramco. It means that current production constraints would continue for another a quarter or so – probably Q3 and perhaps into Q4. We then expect a gradually increasing production. Stock levels in consuming countries continue to decline and are now at levels close to the average for the last five years.
Strong increase in scrapping
On the supply side, we can affirm that scrapping of older vessels has gained momentum during the first quarter. A total of 66 tankers were scrapped during the quarter, equivalent to two-thirds of total scrappings for 2017 (which in turn exceeded the 2016 figure). The number of scrapped VLCC tankers was 18, which is more than 2016/2017 together. If this rate persists, scrappings for 2018 will be the highest in many years. The development is very positive and an important step towards correcting the vessel balance. This trend, in combination with the relatively few planned new vessel deliveries, leads us to expect relatively low net growth during the current year.
Continuing belief in an autumn turnaround
Developments in recent weeks have strengthened our belief that the tanker markets will start to show a gradual improvement from autumn. The markets are very volatile in nature and we are in a trough at the moment, but, as many times before, the markets will recover. The world economy is strong and underlying demand for oil remains strong. For 2018 and 2019, the EIA forecasts economic growth of almost 4 percent and increased demand for oil corresponding to 1.7 million barrels per day. This provides a stable foundation for positive development.
The IMO’s new sulphur directive for 2020 (max 0.5% sulphur content in fuel oil) is becoming a major topic of discussion. The tanker industry’s position of principle on this issue – which we also back – is that it is something to be resolved by the oil companies, which are, after all, the ones who produce oil products. However, it should be remembered that the refineries’ conversion from high sulphur to low sulphur production is complicated and requires large investments. It remains our view that there will be sufficient access to bunker oil with lower sulphur content, albeit at an initially higher price. We have therefore decided to hold back on the alternative solution of installing scrubbers, which would mean investing in exhaust gas cleaning systems on board the vessels to “wash” the exhaust gases so that only the equivalent of 0.5% sulphur is released.
New disclosure brings increased transparency
For our part, we continue to work according to our strategy. We have just held our AGM, and earlier this week we published our interim report for the first quarter. A new feature is that we now present the affreightment status for the current quarter at the time of the interim report’s publication. This provides a snapshot of the share of chartered days (of the total number of possible chartering days) and average earnings for the chartered vessels – more disclosures to ensure we are as transparent as possible.