Tankers: Long Term Prospects Could Be Rosier
According to Gibson, “OPEC+’s decision seems well reasoned. Whilst crude oil prices had been trading around pre-pandemic levels, there was evidently a disconnect between the paper and physical crude markets. The paper markets seemed to be pricing in forward demand, whilst the physical crude markets were showing signs of oversupply. This is unsurprising. Spring maintenance programmes, most notably in Asia will peak through April and May.Whilst forward demand looks more promising as the northern hemisphere moves into Spring and vaccination programmes gather pace, the recovery in physical demand is not there just yet. Any increase in production would risk flipping the market into a surplus and delaying the recovery”.
The shipbroker added that “inventories would have been the key focus for OPEC+. Stocks in Europe and the US have shown relatively consistent drawdowns. But it is inventories in Asia which are still of concern. Stocks in China are reported to have started building once again, reducing short term physical buying interest. Indeed, in the past week Chinese companies have been seen reoffering term barrels in the market, providing evidence of the demand weakness at home. And even in the US this week, a record build in crude stocks caused by weather related refinery outages reversed the trend in inventory declines. The stock build in the US will likely reverse itself in a matter of weeks as refineries restart, but still adds yet another argument to OPEC+ maintaining production”.
“However, in the months ahead, physical demand for crude is set to increase. Most refinery maintenance programmes will conclude during May and this will lead to an increase in demand for June delivering cargoes. At the next OPEC+ meeting the pressure to increase output will grow, particularly if buyer interest for June delivering crude firms. In addition, the extra month or so of production restraint will further help rebalance inventories, which will mean when demand does recover, a greater portion of the demand increase will come from increased seaborne crude trade. In effect the longer OPEC+ keep inventories drawing, the more direct the correlation is between tanker demand and rising oil demand. However, based on OPEC+’s recent behaviour, the base case is that production will only increase slowly this year and whilst it will lift demand and freight rates, the pace of recovery will be modest. Owners may have to endure challenging conditions for a little while longer”, Gibson added.
The shipbroker concluded that “the prospect of more months of pain may also increase the argument to scrap. At present, high bunker prices, low freight rates, attractive scrap prices and increasing regulatory pressure should all create a healthy tanker scrapping market. Yet, so far this year scrapping has underperformed partly due to secondhand values for old tonnage outpricing scrapping values. Yet, many of these secondhand buyers are increasingly failing due diligence checks, whilst demand for older tonnage for further trading is finite and will eventually ease. Furthermore, those sellers who are unable to find a buyer who passes due diligence will increasingly find the only option is scrapping. Ultimately the news from OPEC+ would have been disappointing for many, but for the longevity of the market, owners short term pain will be their long-term gain”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide