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Slow recovery, sporadic rallies to be hallmarks for tankers

Dirty and clean tanker markets across Asia-Pacific are expected to stage a modest recovery next year, but pre-pandemic demand is unlikely to return anytime soon, unless there are a series of bullish surprises.

Freight market participants do not expect next year to be worse off than second-half 2020 in terms of tanker demand, but are projecting a slow recovery with occasional bursts of rally.

They cite the example of the recent spike in clean tanker rates to a six-month high due to strong distillates demand in Australia, where the Kwinana refinery is being shut down and a potential Chinese export surplus of almost a million b/d.

In dirty tankers, almost all owners are positive about revival in Libya’s fortunes as well as OPEC and Russia ramping up output by 500,000 b/d, which alone could translate into additional demand for around seven VLCCs per month, or 14 Suezmax tankers per month, respectively.

The recent downturn was a correction, not a long-term crisis and freight rates are likely to “normalize” in 2021, Oslo-based Ole-Rikard Hammer, a senior analyst with Arctic Securities, said.
OIL INVENTORIES AND TANKERS

Oil demand has rebounded from the trough in the second quarter, but oil production has not, Hammer said.

This implies that the inventory overhang, which is keeping a lid on any meaningful recovery in freight, is disappearing very fast, he said. The US crude inventories, Hammer points out, are falling twice as fast than the previous record.

Oil demand in the third quarter is estimated at 94 million b/d, up 10% from the second, Enrico Paglia, a Genoa-based senior analyst with Banchero Costa, a shipping brokerage and consultancy, said.

Daily spot VLCC earnings on the key Persian Gulf-North Asia routes almost doubled between end-November and mid-December to around $15,000/day, according to brokers’ estimates.

US crude inventories are still above the five-year average providing refineries the flexibility versus the need to import, but the cushion is disappearing, Hammer said.

However, recent gains in freight have been from a lower base and demand is still week. Total VLCC spot fixtures for crude loading in the Middle East for the last several months have been less than 100, according to shipping industry estimates, compared with more than 150 each month before the crisis.

With the public avoiding mass transportation and heading for the highways in cars, any possible near-term revival could only be in the case of gasoline, which constitutes around one-fourth of the global oil demand, BIMCO’s Copenhagen-based chief shipping analyst Peter Sand said. However, pre-pandemic demand is unlikely to return because of the ongoing lockdowns and many working from home, Sand said.

Oil demand and freight levels may remain weak throughout 2021, but a green shoot for recovery is the increase in China’s oil demand, Olivia Watkins, head cargo analyst at UK-based shipping consultancy, VesselsValue, said.

Over the last three years, China has increased its refining capacity, implying larger potential to import crude, Watkins said.

China is expected to add 440,000 b/d, or 22 million mt/year, of new capacity in 2021, in addition to the 260,000 b/d projected to come online in 2020, Platts data showed.

While one source of incremental crude trade could be the US, which keeps tankers occupied for a longer duration; OPEC easing supply means increased exports from the Persian Gulf, Watkins added.
RECOVERY – IF, HOW AND WHY

“The tanker market is at such a low level that some recovery is on the cards, but healthy freight rates for a prolonged period of time are a lot further away in the future,” Bancosta’s Paglia said.

The collapse of demand during the first quarter of 2020 created a large stockpile of oil inventories that Paglia and BIMCO’s Sand said needs to be brought back down.

Arctic’s Hammer said some of this is already happening and what is needed is stepping up output, which OPEC and Russia announced recently.

While inventories are coming down, a lot more demolition activity may start, Paglia said. Only six product tankers and three crude tankers — and no VLCCs — were demolished in the first 10 months of 2020, he said.

The recovery is expected to pick up speed as the coronavirus crisis hopefully comes under control and there is plenty of pent-up consumer demand, Hammer said. Hence, crude producers and refineries will boost supply as prices return to acceptable levels, which in turn will flow down to higher demand for tankers, he said.

On the contrary, freight could also rise if oil prices fall and there is another round of floating storage on tankers, VesselsValue’s Watkins said.

While gasoline holds the key, Sand said jet fuel is the most badly hit commodity and also the one that will see demand depressed for the longest time, probably 2024 for pre-pandemic levels to return, and much longer if a vaccine proves ineffective.

Further, as EIA pointed out in its recent estimates, even after recovery, oil demand next year may remain below the 2019 levels.
Source: Patts

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