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Tankers Could Face Headwinds from 2021 Onwards

Extreme volatility with a dash of oversupply come next year, could be the “recipe” for the tanker market moving forward, as shipping tries to adjust to the new reality shaped by the pandemic and its economic aftermath. In its latest weekly report, shipbroker Gibson said that “in April both crude and product tanker rates surged to record levels, despite the agreement reached between OPEC+ members to cut crude production by 9.7 million b/d in May/June and expectations that non-OPEC+ countries will contribute a further 5 million b/d in cutbacks. Being hit by logistical bottlenecks and land-based storage capacity constraints, crude and product tanker floating storage started to rise, while disruptions caused by quarantine measures also translated into port delays, most notably in Latin America”.

Source: Gibson

Gibson added that “over the next few months floating storage is expected to be a feature of the market, while the collapse in demand outstrips global production cuts. At the very least, this will offer a degree of protection to tanker earnings facing a dramatic drop in trading volumes. However, there is also a possibility that storage demand will be greater than the fall in trade, with TCE returns remaining at very healthy levels. One way or another, while tanker storage and port disruptions persist, extreme volatility in the tanker market is likely to remain”.

“However, the situation is expected to change dramatically once oil demand and supply conditions move towards a more balanced position. This is likely to take place once global economy leaves the peak of the Covid-19 pandemic behind and world oil demand begins to recover. The latest IEA monthly report tentatively suggests that this potentially could happen in the 3rd quarter of this year, with measures to soften lockdown restrictions already underway in several countries. However, there is still a great degree of uncertainty about the duration and severity of virus outbreak”, Gibson noted.

According to the shipbroker, “when we move past the peak of the pandemic, floating storage could be the first to come under pressure due to its relatively high cost in comparison to land based facilities. Meanwhile, trading volumes are expected to remain severely disrupted as the demand recovery could be slow. The fear of a 2nd peak in the pandemic is likely to see some quarantine measures remaining in place well into next year. As such, it could well take 12 to 18 months, if not longer for demand to get back to levels seen in 2019. In addition, there will be a need to bring down the inventories accumulated during the outbreak. With this in mind, it is not surprising that OPEC+ agreed to maintain 5.7 million b/d of output cuts throughout 2021 and during the 1st quarter of 2022. Non-OPEC+ production could also remain under pressure beyond 2020, due to a dramatic decline in oil prices, with US output arguably the most vulnerable. According to the latest EIA monthly outlook, US domestic crude production is expected to decline by around 0.75 million b/d in 2021, after a nearly 0.5 million b/d drop this year”.

Gibson concluded that “all of the above suggest a strong possibility that tanker demand next year could remain below 2019 levels. However, at the same time tanker supply is expected to increase, with over 300 new vessels over 25,000 dwt scheduled for delivery between now and December 2021. The combination of weak demand and rising supply could apply a considerable downward pressure on industry earnings, but the key sensitivity to this gloomy outlook is the speed and robustness of the oil demand recovery in months ahead”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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