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Monday, August 24, 2009

Mid-term tanker demand expected to rise; Will tanker rates follow?

Monday, 24 August 2009

Tanker owners are obviously contemplating their future strategies as they are faced with serious challenges, with the winter season closing in and demand for oil expected to go upwards. Brokers like UK’s Gibson highlighted that tanker demand will go up, but it’s not quite certain that the same will apply for tanker rates as well. The broker said in one of its latest reports that in terms of OPEC production and tanker demand, we could now be at a turning point. “Most commentators are suggesting that by the end of this year or the early part of next year there will be a bounce-back in the key economies and so a return to year-on-year growth in oil demand. Current indications are for an increase in oil demand of 0.5-1.5 million b/d next year. Taking the middle ground and assessing the oil supply/demand balance, this would indicate Middle East OPEC production increasing by close to 1 million b/d over the next 18 months. On the face of it, this is a good thing for tanker owners, but there are another 88 VLCCs scheduled for delivery before end 2010!” said Gibson.
This undeniable fact, together with the fact that the number of tankers scrapped has been quite low thus far in 2009, could mean that owners won’t be able to capitalize on this favorable turn of events. In fact, according to figures from Drewry Shipping Insight, the total tanker capacity which exited the market amounted to a mere 2.2 million dwt for the period from the beginning of the year and until the end of July. It’s even lower than the same period of 2008, when the tanker capacity scrapped in the relevant period had reached 2.76 million tons. Mind you, during the same period of last year, tanker rates were still climbing near their all-time highs.
In fact, tanker supply could still be a major issue, which could have a negative impact in terms of rates going up, with fundamentals in this market being quite accurate thus far. From what has been observed in the market from 2007 through to mid 2008, oil demand was increasing, oil prices were booming towards $140/bbl and as a result OPEC responded with sharp increases in crude production. With this, Middle East OPEC output increased from 20.3 million b/d in the first quarter 2007 to close to 22 million b/d through mid 2008. These incremental supplies were long haul and so had a maximum benefit for the tanker industry. Market psychology and these tightening fundamentals pushed Middle East VLCC earnings from $40,000/day at the start of 2007 to an average of $140,000/day for the second quarter 2008 (and a peak in excess of $200,000/day in July 2008).
Then crisis struck, with OPEC being forced to slash output in order to prevent oil prices from tumbling even lower than the $40 barrel they had reached during December of last year. Middle East producers have cut their production from 22 million barrels per day to around 19.5 million barrels, a level not seen since April of 2004. According to Gibson, “this, fundamental collapse in long haul tanker demand, combined with increases in supply, has meant earnings have dropped like a stone to less than $20,000/day for double hull VLCCs in the Middle East”. As a result, a lot of questions have to be answered from tanker owners, if they should seek to lead the market’s fundamentals again on positive ground and recover from the crisis.