Tanker Market Expected to Face Huge Downward Pressure During 2020 says McQuilling Services
McQuilling Services is pleased to announce the release of its 2020-2024 Tanker Market Outlook. This 185-page report provides a detailed analysis of oil fundamentals, global economic and geopolitical context in addition to tanker demand and supply projections across eight vessel classes. The interaction of tanker demand and vessel supply variables is processed using advanced quantitative modeling to produce a five-year spot and time charter equivalent (TCE) forecast for eight vessel classes across 24 benchmark tanker trades, plus four triangulated trades. Also included in the report is a robust five-year asset price outlook as well as a one- and three-year-time charter rate forecast through 2024.
Freight rate volatility in the tanker markets reached unprecedented levels over the final quarter of 2019 due to supply-side disruptions from US sanctions on COSCO entities. Absent these sanctions, our models suggest that the final three months of 2019 would have resulted in a US $45,000/day downward adjustment to VLCC earnings. At the same time, we acknowledge that increased floating storage and scrubber installations did contribute to a tighter market, however these factors were offset by tempered crude demand at refineries from hardly any widely-anticipated growth in MGO demand, but also a shift towards a more regionalized crude trade flow environment. The freight rate volatility spread to the clean tanker markets as owners converted clean tankers to dirty trading, reducing available supply to meet demand.
Looking ahead, McQuilling Services’ assessment of crude tanker demand shows only modest growth of around 1.0% in 2020, (which is likely to fall below our initial expectations from the Corona Virus situation) as long-haul demand from the Atlantic Basin to Asia falls short of expectations. Contrasting our low demand expectations is an increasing likelihood of high net supply growth from the release of floating storage vessels back into the trading fleet, waivers on COSCO tonnage, slower scrubber installation activity and a still formidable delivery schedule of 41 VLCCs this year. The results of our analysis points to a weak freight rate structure in 2020, in-turn pressuring owners’ earnings in the context of higher VLSFO bunker pricing.
On a weighted average basis, McQuilling Services anticipates spot market earnings for VLCCs to measure US $24,600/day in 2020 on a standard consumption basis, without the benefit of a scrubber. Over the forecast period, our long-term models show a material slowdown in new contracting as owners face a challenging earnings environment in 2020 while discussion on future emissions regulations creates uncertainty in the minds of owners. This is projected to lead to a sharp reduction in net fleet growth beginning in 2021, assuming our expectations for heavy deletions of older tonnage materializes. As a result of an expected improvement in global economic activity in 2021 amid a slower delivery schedule and accelerated deletion activity, we predict that tanker earnings for VLCCs will move higher and peak at US $47,400/day in 2022, before trending back down over the final two years of our forecast period.
Clean tanker demand is expected to be favorable for owners over the 2020/21 timeframe amid increasing product supply in key export centers such as the Middle East and Far East. We anticipate growing LR demand from the Middle East into Europe, particularly for gasoil and jet fuel, although this is likely to back out MR2 demand from the US Gulf into the Continent, instead pushing these barrels into South America. Pressure on clean tanker demand will emerge over the forecasting period from materially lower gasoil demand in Europe, as well as the introduction of new refinery capacity in West Africa. A potential for refinery closures in Europe is becoming a more probable scenario in the medium term.
Net fleet growth for the refined product tanker segments remains manageable for owners over the early part of the forecast cycle, before a predicted resurgence in clean tanker ordering adds significant supply in the later years. On this basis we forecast spot market earnings for MR2s to average US $16,430/day in 2020, peaking two years later at US $17,200/day and trending significantly lower to US $11,750/day in 2024.
Source: Mcquilling Services