Analyst sees new deliveries, slower growth keeping tanker rates low
All segments of the oil tanker market except Medium Range are facing a supply surplus as vessels ordered a few years ago are delivered, which will likely keep freight rates under downward pressure this year, senior Banchero Costa analyst Ralph Leszczynski said.
“The incremental supply is back to the 2011 level as owners rushed to order new ships when freight rates were higher in 2014-2016,” Leszczynski, the head of research at the company, said on the sidelines of the MARE shipping conference in Singapore.
VLCC owners are currently earning less than $7,000/day on Persian Gulf-North Asia routes, according to broker estimates. This is a far cry from end 2015, when they were earning close to $100,000/day.
Banchero Costa is a Genoa-based shipping consultancy and brokerage.
The new VLCCs and Long Range tankers are entering the market at a time when growth is slowing, though not declining.
“During 2015-16, when crude prices were on the lower side, importers were purchasing and transporting crude not only for consumption but also for building stocks,” Leszczynski said.
Now it is the reverse; as crude prices have recovered, importers are dipping into cheaper inventories, he said.
Consumption has not declined, but the use of inventories implies a slowdown in growth, he added.
Freight rates are lower because the new buildings are competing with the existing fleet for the same volumes.
Crude oil is the single most seaborne traded bulk commodity in the world with trade estimated at 38 million b/d or 2 billion mt/year.
“Traded volumes have not increased significantly in the previous decade though patterns have dramatically changed, resulting in longer voyages and employment for ships, as some carry crude from the US to East Asia,” he noted.
However, there were deliveries of more than 20 million dwt of dirty tankers for two years in a row, with 94 and 129 such ships entering the fleet in 2016 and 2017 respectively, according to Banchero Costa estimates.
Last year, over 100 new dirty tankers were ordered, of which almost half were VLCCs. As this supply comes on stream, it will add to supply pressure.
“Excessive capacity growth in fleet, the cut in crude output by OPEC and non-OPEC countries and destocking by importers is hurting the tankers industry,” he said.
On the positive side, there are more than 160 VLCCs that are either more than 15 years old or about to turn so this year. “There are plenty of potential scrap candidates built from 1998,” Leszczynski said.
Excess supply will also weigh on the LR market this year, but the scenario is better for MRs.
“There are way too many ships among LRs, while the additional demand that was supposed to come for [loadings] in India hasn’t happened,” Leszczynski said. The surplus of LR ships was keeping rates relatively low, he said.
Close to 10 million dwt of product tankers were delivered in both 2017 and 2016.
There have been prolonged periods since last year when the earnings of LR owners have been less than $5,000/day on the benchmark Persian Gulf-Japan route, according to the estimates of brokers.
In the MR segment, supply peaked a couple of years ago and now the balance with demand was better, Leszczynski said.
There is more demand to move cargoes on MRs within East Asia, intra-Americas and also for long hauls from the Far East to the Americas, and large volumes of clean products were being loaded on MRs in China, he said.
“The order book is now falling off. New contracting has been extremely limited over the last two years,” he added.
In 2015, more than 130 MRs and almost 100 LRs were ordered, while last year the corresponding number was around 40 MRs and under 10 LRs.
The fleet of product tankers has expanded by 5%-6% in the last three years due to strong deliveries and low demolition, but a slowdown is now expected, Leszczynski said. Banchero Costa projects a fleet growth of 3% this year.
Just as was dirty tankers, there is a great scope to scrap old product tankers as well, he added.