In an interview with Hellenic Shipping News Worldwide, Mr. Nigel Richardson, Managing Director of Gibson Shipbrokers Ltd. Highlighted the extremely weak tanker markets "“ especially the VLCC segment "“ during the first half of the year and the reasons behind it.
Regarding the estimates for the near future, Mr. Richardson mentioned that "the market prospects for tanker owners over the next couple of months remain weak, as tanker supply will continue to grow rapidly, putting downwards pressure on tanker rates. At the same time, there is very little obsolete or elderly tanker tonnage to be removed from the fleet, thus demolition will not have any notable impact in slowing fleet expansion" he said.
Contrary to popular belief, OPEC recently decided to keep oil output steady in a more than ambivalent decision. How do you think this development will impact the tanker market?
Despite the decision taken, indications are that OPEC production increased substantially in June. However, this has so far failed to provide a boost to the larger crude tanker segment. On the contrary, tce earnings for VLCCs and Suezmaxes on benchmark trades sunk to or close to their lowest levels seen this decade. These developments only highlight the fundamental problem of tonnage oversupply currently present in the market.
How would you summarise the first half performance of crude tanker market in all sectors?
All crude tanker markets weakened considerably in the first half of this year due to the abundance of available tonnage amid the ongoing rapid expansion of the tanker fleet. However, the fall in charter costs did not fully reflect this extreme weakness in crude tanker earnings because of consistently higher bunker prices.
Tce earnings for VLCCs in the first half of this year were at their lowest level this decade, despite rising Middle East crude production and more spot cargoes. This weakness was underpinned not only by excess supply but also by the fierce competition from the depressed Suezmax market; spot tce earnings for Suezmaxes trading West Africa "“ USAC were even lower than in 2002, the last major period of weakness in the industry.
The Aframax market was weaker in 1H 2011 than in 2010, but it remained above levels seen in 2009 due to a couple of spikes, most notably in March 2011. These spikes were caused by temporary factors, such as heavy ice class conditions in the Baltic during the winter season, other weather related delays and developments at the start of the Libyan crisis.Β However, the easing of ice conditions in the Baltic and the halt to Libyan exports quickly reversed the position.
What about product tankers? How did they fare in the 1st half?
Rates for larger product tankers were also weak, but one area that bucked the trend was MR tankers, particularly in the West.Β This was all the more spectacular given the exceptional lows seen back in 2009. In particular, rates and earnings for MR tonnage in the Atlantic Basin firmed impressively in March, April and May this year above the average levels seen during the previous two years. This strength was driven by strong chartering demand, wide arbitrage opportunities in the transatlantic gasoline trade and firm markets elsewhere in the Atlantic Basin. Yet, returns for MR tankers in the West have weakened once again since then.
How have the higher bunker prices affected ship owners?
Higher bunker prices obviously have a direct negative impact on net returns of the ship-owner. When the market is extremely weak, as it is now and has been for some time, the impact of higher bunkers is considerably more dramatic.
Over the past month or so, owners across all tanker categories on main routes would have struggled to earn sufficient income to meet their fixed operating expenditure if operating at design speeds. However, as is always the case in such poor market conditions coupled with higher bunker costs, slow steaming has become a common practise in recent months, a necessary tool for vessels' management to maximise revenues in order to recover (and in some cases to recover only partially) the most essential costs.
What are your estimates for the remainder of the year? Do you expect a rebound in tanker activity and more importantly rates?
In our view, the market prospects for tanker owners over the next couple of months remain weak, as tanker supply will continue to grow rapidly, putting downwards pressure on tanker rates. At the same time, there is very little obsolete or elderly tanker tonnage to be removed from the fleet, thus demolition will not have any notable impact in slowing fleet expansion.
In the larger crude tanker markets, the announcement by the International Energy Agency to release 60 million bbls of oil from strategic reserves can potentially have a negative short-term impact on the West African Suezmax market and so also put a downwards pressure on the VLCC rates.
However, there are upside sensitivities to this short term view. Firstly, there are very strong expectations that OPEC will raise output (even if not formally agreed), especially if oil prices remain at or above current levels.Β Also, there is a chance that additional availability of crude in the Atlantic Basin could result in these crudes being more attractively priced to Eastern buyers, prompting longer haul voyages. Finally, there is perhaps a very remote possibility that the stocks release could lead to surplus oil and a return to floating storage, which would boost the tanker market considerably.Β .
Consequently, we do expect crude tanker demand to increase over the remainder of this year, as high oil prices and rising oil demand in the 2nd half of 2011 will continue to put pressure on OPEC to increase production. In addition, there is also a need to make up for the loss of the Libyan crude production. Although further increases in tanker supply this year will potentially hold back any major market upturn, we do expect earnings for larger crude tankers to pick up towards the end of the 3rd quarter and to be much higher in the 4th quarter.
The situation in the product tanker markets is more or less the same.Β However, there are also upside sensitivities; for example, the indications of a very active US hurricane season this year means that the MR market in the Atlantic Basin could spike.
In all, we do expect earnings to rise (from current very low levels), but the crude tanker market still faces more new deliveries.Β The supply concerns in the product tanker market are far less than in the crude sector.
Moving forward, do you expect ton-mile demand to be better for tankers?
World oil demand is forecast to increase in years to come and so there will be further gains in the OPEC production, supporting more longer haul trades. The issue is then one of supply; how many more tankers will be delivered/ordered?
Nikos Roussanoglou, Hellenic Shipping News Worldwide