As the market moves towards a traditionally strong earnings period, characterised by a jump in fuel demand, the underlying structural weaknesses and shorter-term happenings indicate that the tanker market may not be heading for an upturn. Through August and September, supply cuts aimed at maintaining crude benchmark prices reduced the amount of available cargo stems despite the tentative return of Libyan volumes in the Mediterranean. Additionally, as a result of labouring oil products demand in key markets, refineries were still not reaching pre-corona refining run rates and a number of rumours began to circulate about the possibility of closures or a reorientation to biofuels, particularly in Europe. Finally, the tonnage that was tied up in floating storage deals, the key market driver earlier in the year, has started to trickle back into the trading fleet. Overall, the cocktail of weakness inducing factors does not make for good reading for the sector.
In particular, European crude imports could be set to decline in the coming years as its refinery capacity comes under threat. Over the summer months, a number of major refiners have intimated that a reduction in refining capacity is a distinct possibility. The pressure on refining margins is causing losses to mount at some of the older, less efficient facilities, prompting a period of review. In particular, two North West European refineries have been tipped for closure, although the exact locations have not been disclosed. Furthermore, Gunvor is set to mothball its Antwerp facility following mounting losses. The refinery has a capacity of 115,000 b/d. Elsewhere, Total is looking to convert its 93,000 b/d Grandpuits refinery (near Paris) to a biorefinery as repairs and maintenance costs continue to increase. The future of other refineries also remains uncertain as incremental demand increases continue to be met with inventory drawdowns, in particular this relates to Lukoil’s 320,000 b/d plant at Priolo, which has been operating below capacity for a number of years. The situation has been likened to the aftermath of the 2008 financial crash, when around 1.4 b/d of refining capacity was lost between 2009 and 2012.
Elsewhere, Japan’s crude imports hit a ten-year low, down a considerable 39% from the levels seen in March on the back of lower refinery activity. China’s imports also fell away after a very busy July, the remaining cargoes from its earlier market activity while prices were at historic lows.
Demand volatility is expected to remain, with many countries, both in the developed and developing world now entering into difficult recessions. It had looked as though demand levels would stabilise as progress towards improved treatments and vaccines is made but the speed of the uptick in cases and hospital numbers in Europe has dented the level of optimism around. The squeeze on activity is being further pressurised by the reduction in refinery runs and the return to the trading fleet of the vessels tied up under floating storage contracts. After the sizeable market shocks generated by supply-side factors towards the end of 2019 and into the early months of 2020, a growing number of analysts now seen fleet dynamics, rather than cargo availability and demand to be the key driver. The current size of the orderbook, which stands at a historic low of around 7.4%, means that incremental supply growth will likely have to be met by existing tonnage with the rate of deliveries remaining slow, perhaps providing a certain level of resilience in the market.
Despite the ongoing concern, some trades have bene picking up. While it remains to be seen if China will be able to match the targets set under the Phase One deal with the US, US crude exports to China are still generating a good amount of activity for the segment. Although the level of exports has fallen from the record of 35.2 million barrels in May, the flows to China remained at a good level in August at around 0.7 mb/d and early estimates for September data suggesting a total of over 30 million barrels once again. Despite the drop from the levels seen in May, the flow of oil between the two remains at a far higher average level than in the previous four years in which wild fluctuations were commonplace.
Additionally, September has seen a tentative return of Libyan to the crude oil exporting market and the associated increase in the number of vessel inspections off the Libyan cost by the European Union on behalf of the UN. As such, a number of tankers have been subject to inspections, primarily Suezmax and Aframax vessels, which are seen to be the key beneficiaries of any jump in Libyan export activity. The Suezmax and Aframax segments have seen cargo availability drop in recent months on the back of the reduction in Russian volumes. Braemar ACM has estimated that the resumption of activity at a number of Libyan oil terminals, including Brega, Masra el Hariga and Zuwetina, could see the return of up to 400,000 b/d to the export market, while Ra’s Lanuf could add another 230,000 b/d.
After an extended period of weakness, it does not look as though the traditional fourth quarter earnings increase will be as strong as many in the market would like to see. The underlying weakness in the demand level for both crude and oil products is likely to weigh on the seasonal fluctuations with the rapid downturn in the management of the coronavirus in a number of major markets inflicting further downward pressure. At the time, a number of owners stated that the record earnings in the first half of 2020 would be borrowed from the second half. Many now must be starting to worry that the period that the good times have to cover is becoming ever longer.
Source: Written by Jonathan Mummery, Dynamar Shipping Information & Consultancy