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Daily VLCC earnings to rise sharply in 4Q: Fearnleys

Daily VLCC earnings in the spot market are expected to rise sharply in the fourth quarter to $69,000, from the currently estimated figure of around $11,000, as larger crude volumes will get shipped, more tankers taken for floating storage or fitting scrubbers and delivery of new ones is put off, a senior analyst with Fearnleys said late Wednesday.

The global VLCC market is currently reeling under pressure from ample supply and limited demand.
“There is a turnaround expected in a couple of months as ships will be taken for floating storage, installing scrubbers and more oil is likely to be produced by OPEC member countries,” Dag Kilen, senior analyst for oil and tanker markets with Fearnleys said at the Enmore oil tankers’ conference in Shanghai.

Fearnleys is a global shipping, offshore and energy brokerage.

Crude supply from OPEC member countries is expected to increase in the coming months, Kilen said, pointing out that the group as a whole is currently cutting back to a larger degree than what was officially announced.

“In April their compliance of output cuts was 168%, particularly because of lesser output from Saudi Arabia,” Kilen said. If OPEC member countries bring back this compliance level for output cuts back to 100%, it will result in around 700,000-800,000 b/d of additional supply to the market, he said.

This will increase demand for dirty tankers such as VLCCs to move additional volumes of crude, he said.

Oslo-based Kilen, whose forecasts on tanker freight and earnings are closely tracked by the global shipping industry, said the average daily VLCC earnings next year are expected to be $60,000.

He said that due to US sanctions imposed on Iran, the country’s fleet can no longer be used to move crude and will reduce supply. However, demand for Iranian crude will be substituted by other origins, which will then have to be moved in tankers belonging to other owners.

Over the next six months, several tankers also plan to get scrubbers fitted in line with the upcoming sulfur emission rules for marine fuels.

Installation of scrubbers can pull a supertanker out of the market for up to 40 days, including days needed to go into and come out of the shipyard until loading of the next cargo, potentially reducing supply, Kilen said.

Most of the ships that intend to install scrubbers are yet to do so and this implies they will get it done during the second half of the year.

He said that while close to 76 VLCCs are scheduled to be delivered in 2019, around 34 have already entered the global fleet and delivery of many others may spill over to next year.

Towards the end of each year, owners prefer to postpone delivery of their ships to the following year, in order to get a younger age profile, which has a bearing on freight earned in later years.

Last year, the slippage of VLCC deliveries into 2019 was around 18 and delivery of anywhere between 15-20 such tankers may now spill over into 2020, Kilen said.

For the rest of 2019, the delivery of new build VLCCs is unlikely to more than half a dozen each month, he said.

Due to the higher VLCC earnings expected in the fourth quarter, the average for 2019 as a whole is now projected to be $40,000, he said.

The International Maritime Organization’s (IMO) new norms for sulfur emissions from marine fuels, to be take effect January 1, will push up demand for heavy sweet crude, Kilen said. Such grades have lower sulfur and their demand will increase the need for VLCCs, he said.

At the same time, US exports of shale crude may grow at a slower pace because these are lighter sweet grades, similar to condensate.

The market needs more sweet crude because of their lower sulfur content but of heavier and not necessarily lighter grades, he said.

The shipping sector will add significant demand to the already strong trends seen in gasoil due to the upcoming IMO regulations, Kilen said.

He forecast LR2 daily earnings, basis one-year time charter, at $23,400 this year, up from $14,800 in 2018, and said they are projected to jump to $31,700 next year.

Kilen said several LR2s have been taken this year to move European gasoline to Australia. In the past, typically this demand was met from Singapore and North Asia but the surplus in Europe opened up arbitrage opportunities for longer voyages.
Source: Platts

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