Tanker shipping: a tough year ahead as virus mutations and slow vaccine rollout hampers recovery
After a turbulent year, low demand looks set to plague the market in the coming months combined with too many ships fighting for too few cargoes in both the crude oil and oil product segments.
Demand drivers and freight rates
The realities of the pandemic are setting in for the tanker market. The record-breaking Q2 2020 is a distant memory and, instead, the market faces a slow recovery with low demand, stock drawdowns in consuming countries (with products already where they need to be and therefore not being transported by sea) and loss-making rates.
Perhaps the most notable example of this is on the benchmark Middle East Gulf to China trade where earnings (voyage revenue – voyage costs) have fallen from USD 250,354 per day in mid-March 2020 to USD -1,056 per day on 15 February; voyage revenues are so low they no longer cover voyage costs, let alone operating and financing costs.
Average earnings for the whole market are slightly better at USD 3,416 per day for a Very Large Crude Carrier (VLCC) on 12 February. But they are still far from what BIMCO estimates is needed to break even (USD 25,000 per day). Similarly, rates for Suezmax and Aframax crude oil tankers are far from their estimated break even point, earning just USD 8,767 per day and USD 3,803 per day respectively. One-year time charter rates are also failing to break even, meaning that some owners fixing ships on these now are accepting daily losses of a few thousand dollars for the next year. Only a few ships are taking these long-term loss-making rates, and are doing so simply because owners and operators believe this will minimise their losses, and that a year on the spot market will lead to bigger cuts to income.
Oil product tanker earnings are also stuck far below break even levels. So far this year, an LR2 has seen average earnings of just USD 4,201 per day. Handysize ships have been the best performing product tankers though, with average earnings of USD 5964 per day, there is little reason to celebrate.
When it comes to cargo demand, oil products were hit in different ways by the crisis; while some are already recovering, others have yet to see any meaningful upturn. Total EU seaborne imports of oil products ended 2020 down by 19.6%, with fuel oil performing the worst, plummeting 53.8% year on year. At the other end of the scale, gasoline imports – accounting for 10.9% of EU seaborne oil product imports –rose 5.1% to 17.4m tonnes. At almost half of total imports, gas oil imports fell to 77.7m tonnes (-11.4%).
Unlike in Europe, Chinese refinery throughput was quick to rebound from its fall at the start of the pandemic, ending the year up 3%, with December seeing a record high throughput of 60m tonnes. Domestic demand fuelled this recovery, as exports of refined oil products fell by 7.5%. Over the year, Chinese crude oil imports rose by 7.3%, slightly down from the 10% growth in imports in both 2018 and 2019, but still considerably outperforming the rest of the world.
Towering above the total growth rate of 7.3%, Chinese crude oil imports from the US rose by 211.3% in 2020 compared with 2019, as Phase One of the US-China trade agreement meant an extra 13.4m tonnes of crude oil being sent across the world. Over the year, Chinese imports totalled 19.8m tonnes, leaving the US as the ninth biggest exporter of crude oil to China. This list is dominated by Saudi Arabia and Russia from where China imported 84.9m tonnes and 83.6m tonnes, respectively. The two provide 31.1% of all Chinese crude oil imports.
In total, US crude oil exports rose by 6.3% in 2018, continuing the upward trend that began once the ban on crude oil exports was lifted at the end of 2015. This is a marked slowdown from the 52.5% growth in 2019 and 95.3% in 2020. Tonne per mile growth outperformed that of tonnes, coming in at 11.1%, as higher exports to Asia boosted sailing distances.
The many years of strong growth in US crude oil exports has provided much-needed demand for tanker shipping. This is especially the case when considering the much longer sailing distances between the US and the Far East – the largest import market – compared with that between the Middle East and Far East.
Following the shocks of the past year, there are worrying clouds on the horizon for US crude oil exports. The country has higher production costs compared with the world’s other dominant producers, and 2020 has squeezed profit margins and investment. Oil-producing rigs in the US numbered 306 in mid-February – 372 fewer than a year earlier (source: Baker Hughes). This will limit growth in US crude production in coming years, especially if the oil price fails to rise further. That said, US crude oil production has not fallen by as much as the drop in number of rigs would suggest; average quality has increased, given that the worst-performing rigs are the first to be closed.
Refineries are also having a hard time, as new lockdowns in Europe and global travel restrictions put a further recovery in global oil demand on hold. Average US refinery throughput in January was down 11.5% compared with January 2020, at 14.6m barrels per day. At 82.3% at the end of January, US refinery use has recovered from its lows in the high 60s, but remains below its pre-pandemic level. Demand and margins remain depressed, and refineries that may only have been temporarily shut at the start of the pandemic, are now closing permanently, affecting the demand for crude oil inputs.
US oil product export, which in some weeks at the end of 2020 were above levels in the same period of 2019, have begun the year 5.5% lower than in 2020 but are still up 2.1% from the start of 2019.
The recovery in US demand for oil products has been mixed because restrictions affect elements of demand in different ways. Petroleum product supplied was down by 11% in the last week of January 2021, compared with the same week in 2020. Gasoline was down 13%, and jet fuel fell 54.7%, after an uptick in the number of flight passengers over the holiday season came to an end. On 7 February, daily US flight passenger numbers were down by 62.4% compared with 2020.
At 2.5%, the oil product tanker fleet growth expected by BIMCO is on par with the 2.4% increase in the market experienced in 2020. Crude oil tanker fleet growth is expected to decline from 3.3% in 2020 to 1.5% in 2021, closing in on its low point of 0.9% advance in 2018.
So far this year, 26 crude oil tankers have been delivered, totalling 3.7m dead weight tonnes (DWT), along with 16 oil product tankers with a combined capacity of 1.1m DWT. Over the year, BIMCO expects oil product tanker deliveries to reach 5.7m DWT, and crude oil tanker completions to fall from 18.7m DWT last year to 14.2m DWT this year.
Since the start of the year, the orderbook for both crude oil and oil product tanker ships has dropped, as fewer new tankers have been ordered (2.5m DWT) than have been delivered, reflecting concerns of the outlook and the current state of the tanker freight market for both ship types.
The poor market conditions are also starting to be reflected in tanker demolition activity. COSCO singled itself out in January by announcing that it was scrapping five VLCCs, three Suezmaxes, one Panamax and a Handysize tanker. This action alone brings crude oil tanker demolition so far in 2021 to levels comparable with those in the whole of 2020. Only four VLCC were demolished last year, along with three Suezmax, six Aframax and three Panamax ships. In all, 21 oil-product ships were scrapped in 2020.
Over the year, BIMCO expects crude oil tanker demolitions to rise to around 7m DWT. Oil product tanker demolition, on the other hand, is expected to rise from 1m DWT in 2020 to 1.3m DWT in 2021.
As well as rising demolitions, the poor outlook for oil tanker shipping is reflected in the resale value of second-hand ships. In January 2020, the average resale value for a five-year-old VLCC was USD 75.5 million; the average this year is USD 64.5m – a loss of USD 11m in 12 months. Values of second-hand oil product tanker ships have fallen slightly less, with a five-year-old LR1 losing just under 10% of its value over a year, from USD 32m to USD 29m (source: Intermodal).
Compared to a straight-line depreciation over 20 years, current VLCC values are between 10% and 20% lower, with a five-year-old VLCC closest to its straight depreciation value, and a 10-year-old ship the furthest away.
The extended OPEC alliance (OPEC+), headed by Saudi Arabia and Russia, went through its up and downs in 2020 and the frailties revealed by the oil price war do not seem to be easily overcome. In early January, the grouping announced that, while Russia would be increasing production in February and March, Saudi Arabia would voluntarily cut its production by 1 million bpd. The different approaches reflect the countries’ focuses, with Russia keen to limit growth in US market share and Saudi Arabia worried about production outpacing demand.
For shipping, if Saudi Arabian exports to China are replaced by Russian crude oil, it is good news, because exports from the Black and Baltic seas have to cover a longer distance than exports from the Middle East.
As the year progresses and global crude oil demand recovers, the OPEC+ alliance will find itself walking a tightrope when it comes to balancing production cuts with the demands of its most dominant producers. For how many months will Saudi Arabia be willing to cut its production, while others pump out more? And what level of US oil production is Russia willing to accept? With OPEC’s ability to determine not only crude oil prices, but also demand for tanker shipping – which was laid out over the course of 2020 – it will be a key factor to watch how this extended alliance faces difficult decisions this year.
In February 2021, the US Energy Information Administration (EIA) estimated that OPEC produced 24.8m bpd, 3.2m bpd lower than in February 2020. This is a clear indication that global oil demand is yet to see a strong recovery, and with many of the already widespread travel restrictions being tightened in response to new virus mutations and slow vaccine programmes in many countries, the recovery looks to be many months away.
In fact, the EIA estimates that it will take until Q3 2022 for global oil demand to be back at Q4-2019 levels, with 2021 demand coming in at 97.8m bpd. This is an increase of 5.6m bpd from 2020, but still down 3.4m bpd from 2019.
The slow recovery in global oil demand means many months of hardship ahead for tanker shipping, with too many ships fighting for too few cargoes – unless something unexpected once again rattles the market.
Source: BIMCO, Peter Sand