McQuilling Services Says Crude Tanker Demand to Face Headwinds Over the Longer Term, As Oil Demand Peaked in 2019
Following a historically volatile year, we find crude fundamentals under intense pressure entering 2021 as economic activity remains subdued, although an expectation for a sustained, but gradual recovery remains intact. Traditional ton-mile demand growth is projected to increase by 5.0% for VLCC tankers this year; however, including demand changes from the unwinding of floating storage, our models reveal a 12.5% reduction year-on-year, and down 5.1% from a more normalized 2019 baseline. As the world restores demand following the COVID-19 demand disruptions, we find structural challenges to the crude demand story over the medium term, including decarbonization efforts and the inclusion of biofuels into product supply. As such, we project that crude demand likely peaked in 2019, indicating that the fundamental outlook for crude tanker demand will face headwinds over the longer term. Following the bounce in 2021, our models project annualized crude tanker demand to average 0.45% over the balance of our forecast, as a distribution of positive and negative demand themes emerge.
Demand for tankers transporting refined products finds substantial support from increasing utilization of refinery capacity in the Middle East, whereby gasoil and jet fuel length find growing export opportunities to the West and notably Europe, whereby product supply, particularly Northern Europe may come under pressure from regulatory shifts and fuel switching. Furthermore, we find the Middle East naphtha balance coming under pressure from shifts in refining yields, suggesting longer-haul movement to Asia from West of Suez export centers. Finally, we find MR tanker demand supported by activity between the US Gulf and Latin America, while refinery closures in the Australia/NZ region underpins growing demand in the East, where additional positive factors emerge, including robust growth from the Middle East to East Africa.
Crude tanker fleet growth, when measured on an average inventory basis, will grow 1.2% in 2021, despite our projection for 94 crude tanker deletions this year. We find the net fleet growth in 2022 and 2023 continuing to trend near 0% growth, despite a flurry of contracting transpiring in the second half of 2020 as a reaction to attractive newbuilding pricing. Long-term projections for vessel deliveries point to a cyclical delivery peak in 2024/25, which supports our call for a deteriorating earnings profile in the final year of our forecast period.
Fleet growth for product tankers is anticipated to reinforce support for freight levels and earnings over the forecast period, as the under-ordering of LR tankers in recent years, shows a manageable addition profile in 2021/22, aided by an expectation that deletions will increase in those years. Moderate pressure is expected from switchover candidates. MR net fleet growth is anticipated to decelerate between 2021 and 2023 from historical observations, before a notable rise is predicted towards the end of our forecast period.
In consideration of the demand and supply fundamentals uncovered in our analysis, we project spot market earnings for VLCCs to average US $9,400/day in 2021 on a non-eco, no scrubber basis. The peak year for VLCC spot market earnings in our model has been pushed out to 2024 at US $39,500/day, while Aframaxes are projected to return US $6,800/day in 2021 before taking a similar course. The years 2022 and 2023 reveal improving fundamentals for crude tankers, although we are skeptical that crude tanker earnings in 2022 will fare significantly better than the 2018 market.
The findings from our analysis show a more promising balance of fundamentals in the refined product tanker segments of the market. The strong demand recovery anticipated from core product balance mismatches, along with relatively light increases on the supply side will support non-eco spot market earnings on triangulated voyages for LR2 and LR1 tankers, averaging US $17,100/day and US $15,900/day, respectively over the first two years of our forecast period. The MR2 segment is projected to average US $14,200/day over the forecast period, basis non-eco consumptions, with the 2022-24 period revealing significant strength, following a challenging 2021.
Source: McQuilling Services