McQuilling: Tanker Earnings To Improve Over the 2024-25 Period
“What a difference a year makes?” has become a regular theme for our Tanker Market Outlook report as US sanctions on Cosco, IMO fuel regulations, the COVID crisis have now passed the baton to the geopolitical risks emanating from the conflict in Eastern Europe while an uncertain economic outlook introduces parallel risks. In this year’s edition, McQuilling Services has assessed with great detail the influence these, and broader fundamental developments, are likely to exert on the direction of tanker earnings.
Our prevailing view for the crude tanker markets continues to favor an improving earnings environment over the 2024/25 years, aided by well-known supply side developments, including the bare orderbook for most tanker segments as tight yard capacity and correspondingly high newbuilding prices underpin an inevitable owners’ market in the years to come. However, our analysis finds a bias towards the mid-size tanker crude segments, particularly in the front years, due to the reshuffling of trade flows from Russia to Asian markets and the overutilization of Aframaxes to conduct these marine flows. For VLCCs, we find 2023 to be less fruitful as demand is expected to fall by 6.6% y-o-y and our trade flow model suggests increasing Russian flows to China and India “back-out” long haul VLCC flows to these countries. Added to this cloudy climate for VLCCs is the end of excess inventory draws (US SPR), which undoubtedly were the cause for the temporary spike in the 2H 2022 period. Our call for 2023 TCEs is US $29,000/day for VLCCs, while Aframaxes and Suezmaxes outperform at US $55,000/day and US $47,000/day respectively (basis non-ECO tankers without scrubbers).
Following our views from last year’s report which highlighted the improving fundamentals for clean tankers, the Russian sanctions will exacerbate the demand growth for clean tankers and particularly for the LR segments. While our outlook for MR demand is somewhat less exciting, high LR utilization for East to West product flows are projected to shift some demand down the curve to MRs. This is a natural development in the market (going top-down), which we do not see being replicated the same way in the crude segment due to infrastructure constraints. Within the MR segment, challenges to the US > Caribbean and South American flows could evolve should Russian volumes be redirected to these countries, while increasing competition from more-efficient East of Suez refineries also compete for the traditional market share historically enjoyed by US refiners. This is also likely to be the case in the West Coast South America market as US West Coast product balances tighten due to reduced refinery capacity, which in our analysis gives room for outsized growth in Transpacific volumes. With a moderate orderbook in hand, we project LR2s to earn US $56,000/day on average over the next three years (basis non-ECO tankers without scrubbers), out-earning MRs by 58% during this period.
Due to our view on the outperformance of mid-sized tankers, our forecasting models show secondhand values for Aframax and LR2 tankers have the most upside from current assessments over the next three years, before the next cycle reveals itself at the end of our forecast period. Simultaneously, the weaker VLCC demand fundamentals in the front years relative to mid-sized tankers could result in slower VLCC ordering activity at shipyards, with these slots gravitating to Suezmax, Aframax and LR2 orders. Increasing ordering activity is envisioned to commence as we move through 2023, supported by a 5-7% reduction in newbuilding prices as yard utilization and steel prices ease.