Tanker demand to improve in 2010 as oil production picks up pace
Tanker demand is expected to improve this year, as world oil demand is expected to pick up pace. In an interview with Hellenic Shipping News Worldwide, George P. Los, Research Analyst with Charles R. Weber Company, Inc. says that
demand growth for the year is forecasted to total 1.25 mb/d, while much will depend as well on the continued momentum of the rebound of the world economy, especially oil-intensive economies of the developing world. In terms of tonnage supply, one surprising conclusion is that the VLCCs and Panamaxes classes could experience a negative net fleet growth in 2010, according to Mr. Los. As for the most attractive vessel type among Hellenic ship owners, it appears that the Suezmaxes are currently their favorites, “likely due to the fact that their rate of return is the most attractive.Β Compared to VLCCs, over the past two years Suezmaxes have commanded 17% higher average earnings whilst the acquisition cost averaged around 28% lower” Mr. Los says. The complete interview is posted below.
How would you sum up 2009 for the tanker market in terms of rates?
Last year was a very interesting year for the tanker markets. At the start of the year, dry bulk rates were already abysmal but the tanker markets had remained relatively healthy and the expectation then was that tanker rates would not really slide by as much as their dry counterparts had.Β This, obviously, was not the case and over the course of the year tanker rates posted an average decline of 72% from 2008 levels, with owners facing the reality of operating their vessels at levels below their respective operating costs at many points during the year.
A major part of the problem is that oil producers had decreased output and, in fact, at one point during the year, OPEC members had reached their highest-ever level of compliance with the organization’s oil production targets, thus greatly reducing the number of Middle East cargoes. Simultaneously, the world was amidst a second consecutive year of oil demand destruction with 2009 consumption levels averaging 2% below 2007 peak levels.Β Further compounding the situation, fleet growth averaged 6% for the Panamax and larger size classes.
Such a scenario is certainly not a typical to the cyclical nature of the shipping markets, but 2009 will likely be remembered as the trough year of one of the greatest super cycles to hit the tanker sector.
What’s to expect during 2010 in terms of tanker demand?
I am guardedly optimistic. Looking at the historical data, there tends to be a greater correlation between tanker demand and world oil production than there is with world oil demand.Β For instance, world oil production and tanker demand peaked in 2008, despite the fact that oil demand had actually peaked a year earlier. Accordingly, when 2009 commenced with very low oil prices, OPEC members reached their highest ever compliance with the production targets of the organization and, invariably, this led to tanker demand on the spot markets contracting by about 13% overall from 2008 levels.
Now, at the onset of 2010, the expectation is that with oil prices having returned to a level more favorable to the oil producers and with oil demand projected to return to growth, the expectation is that oil output and thus tanker demand should average above 2009 levels. Many believe that Middle East oil production could rise as much as 1 mb/d by the end of the year while other oil producers, including Brazil, for instance, could conclude the year with a production increase of us much as 500 kb/d.Β Matching this, demand growth for the year is forecasted to total 1.25 mb/d.
To that end, much still depends on the oil-intensive economies of the developing world maintaining their strong rates of growth going forward.Β Moreover, the ability of the US and Eurozone economies to remain out of recession ““ having finally emerged during the 3rd quarter of last year ““ will have a wide-ranging impact on tanker demand as those economies consume the vast majority of the world’s oil.
Also supporting the projected rise in output is China’s progression into the second stage of its Strategic Petroleum Reserve which calls for an additional 170 mbbls by the end of 2011 and, per government guidelines, is to be complimented by an increase of the country’s commercial inventories.
Will the increased demand of tankers for storage which surfaced in 2009, maintain its momentum during this year as well, thus alleviating part of the supply pressures?
On the dirty side, storage has lost much of its appeal in recent weeks and although crude prices remain in contango, the differential has narrowed whilst the recent rise in VLCC rates has essentially made the storage costs prohibitive for new storage deals.Β Approximately 33 million barrels remain in storage at the moment. Of that, some are on longer storage contracts and are likely to remain in storage through the end of the 1st quarter whilst those ships which first loaded their cargoes when oil prices were below $50/bbl could very well see their storage contracts extended well into the 2nd quarter since the profits would still be there even with the storage costs having come up.
On the clean side, due to the exceptionally cold winter weather experienced in the Northeast United States late in December and early in January, some draws were made to the total number of barrels of distillates in floating storage as traders sought to capitalize on the higher spot prices the rise in demand had created.Β Now, with the Northeast United States experiencing above average temperatures, the physical demand has subsided from recent highs, moderating the attractiveness of moving the tanker-stored distillates to the market. Nonetheless, a number of new fixed storage facilities for distillates are coming on stream, notably in the Bahamas, which will most likely translate into decreased clean tonnage being used for storage going forward.
Do you think that the market will face a new building oversupply in the near future?
Thanks to the phase-out schedule for single-hull vessels, new building deliveries will pose less of a threat to the larger size classes in 2010 than was the case in 2009 ““ and, in fact, the VLCCs and Panamaxes classes could experience a negative net fleet growth in 2010.Β As the scheduled deliveries are relatively evenly spread throughout the year, the earlier owners of single-hull tonnage opt to sell their vessels to demolition yards earlier on in the year, the less oversupplied the markets will be during the course of the year.
The outlook for the MR sector, however, is somewhat bleaker. The world fleet expected to rise by over 13% this year alone.Β In the OECD, high unemployment figures and trend in recent years towards greater fuel efficiency, a return to products demand growth is going to be slow to come.Β Therefore, much will depend on the demand growth rates in China and India to help to alleviate some of the excess tonnage, but this, too, will likely take some time so it is very likely that we will see the MR sector lag behind the dirty tankers, rate wise.
How big an effect the abolition of single hulled vessels in most parts of the world will have to the market?
The likelihood is that this will continue to encourage owners of such vessels to look more closely at the demolition prices, which have been much stronger in recent weeks.Β Particularly, South Korea announced last month that all single hull vessels will be banned from 2011, and that the proportion of single hull to double hull tankers discharging there is to be cut to 15% in 2010 from 22% in 2009.
At the same time, though, I think the true affect these bans have on trading options for the single hull fleet has been a slightly overstated.Β India and Thailand are the two largest discharge destinations for single hull vessels, commanding 28% and 26%, respectively, of all single hull spot trades during 2009, and neither has moved to implement their own ban.Β The ban by China is also not very significant, as single hull vessels accounted for just 6% of all tankers discharges there.
During the final weeks of 2009 we witnessed a pick up in tanker investments, especially by Greek ship owners, who were rather keen on Suezmax vessels. Why was that?
I think the final weeks of 2009 brought with them an improved market environment as well as an improved outlook. On this basis, I think some of the Greek owners who had been notably absent from the S&P market but had been well-positioned for some time to expand their fleet, finally felt more confident in doing so, particularly as tanker values have been slower to reflect the boost in sentiment.
Much of the interest from Greek buyers was for the Suezmax sector which is likely because from a strictly return on investment viewpoint has become the most attractive sector.
Many of the Greek buyers approaching the market were keen on the Suezmax sector, likely due to the fact that their rate of return is the most attractive.Β Compared to VLCCs, over the past two years Suezmaxes have commanded 17% higher average earnings whilst the acquisition cost averaged around 28% lower.Β Moreover, Suezmaxes tend to enjoy the greatest level of earnings stability and although owners can make very good money playing the volatility of the other sectors, I think Suezmaxes exhibit less risk from a financials perspective, making them more attractive than other classes in an environment more averse to risk than had been the case before the economic crisis.
In terms of second hand pricing do you think that values will pick up further in 2010?
With more S&P activity having taken place during the 4th quarter, asset values were easier to peg and as such we did end up seeing estimated values ease. Although it’s a bit early on to say with too much assuredness what direction the S&P market will take, it is likely that asset values will hold steady through much of the 1st quarter and if the pick up in earnings proves sustainable past that point, we will likely start to see a firming in the asset values thereafter.
Nikos Roussanoglou, Hellenic Shipping News Worldwide