Small improvements for product tankers, still difficult for crude oil tankers
The markets are roughly in the same situation as they began the year, in other words still really difficult for crude oil tankers and mediocre (i.e. not as bad) for product tankers – but with small improvements in sight for the product tanker segment.
The small improvements in the product tanker segment become clear against the backdrop of combination traffic in the Atlantic. The major trades there are gasoline from Europe to the US, then diesel from the US back to Europe. With inventory levels now gradually decreasing generally, but particularly for products, the market is now beginning to develop positively. During Q4 2017, Atlantic traffic generated average income of about $9,000 per day. During January and February 2018, the average rose to about $13,000 per day and at the time of writing is about $15,000 per day. Still relatively low – but the trend is positive.
The cold and icy conditions in northern Europe (and eastern Canada) now mean a freight premium for ice-class tonnage for transactions in these waters – and this may persist throughout March and maybe into April. The ice situation also means that the voyages often take a little longer to complete, which uses up capacity.
The extremely low crude oil tanker market is largely due to the fact that in the VLCC (Very Large Crude Carriers) segment, many new vessels have been delivered in the last 3-4 months, mainly to shipowners in China and the Middle East, reducing the number of available cargoes on the spot market. And this is in a situation where we are seeing major output cuts in OPEC and also countries outside OPEC, which automatically means less demand for tanker tonnage.
However, the poor markets have resulted in an increased scrapping rate. In 2015, about 20 tankers were sold for scrapping and the same number in 2016. In 2017, the figure grew to about 60 vessels and in the first two months of this year, 32 vessels have been sold for scrapping, which is already half of the relatively high annual rate for 2017. Poor markets and high scrapping prices are working well together and the higher scrapping has a positive impact on the vessel balance.
Turning to production and consumption of oil in the United States, we can see that US crude oil production is continuing to increase and has now cracked 10 million barrels per day (MBD). US oil consumption also continues to rise and is now at just over 20 million barrels per day. This means that half of the need is still met through imports of both crude oil and products. Interestingly, they also export crude oil (about 1.5 MBD), most of which is sold on long voyages to the Far East, but also to Europe, which can result in interesting cargo combinations for large crude oil tankers. We are also seeing an increase in exports of refined products to South America, West Africa and the East.
After some tough years, virtually all oil companies are bringing in the money again – and they are very pleased to have used the oil price decline that began in 2014 to trim costs so that they now actually have a higher free cash flow, with oil prices of $ 60/barrel, than when the price was $90+.
To sum up, the world economy is going well, oil consumption is rising and we are now “just” waiting for stocks to reach a level that allows OPEC and non-OPEC to return to normal production – i.e. an increase of about 1.6 million barrels a day. The tanker market will then be back – and we still think this will happen sometime in the second half of this year.