‘Uncertainty’ of China’s crude cache

While commercial crude oil stocks in the European Union and the US have largely returned to 2019 levels, inflated crude oil stocks in China are a “key uncertainty” for medium term crude imports and dirty tanker demand East of Suez, according to Braemar ACM.

Anoop Singh, head of tanker research at the shipbroker, described the large stockpile as the “biggest problem” for the tanker trade. China is sitting on approximately 750m more barrels than it had in 2019 and 450m more barrels than it had at the start of 2020, according to Braemar ACM’s research. Speaking at the Baltic Exchange Tanker and FFA Market Update, Singh urged brokers to consider what might happen to that stock when considering future tanker demand.

“The questions to ask is how much of it is strategic and how much is commercial stock; how much is accessible to state refiners; how easy it is to access; and what is China’s position on residual stock levels from here,” Singh said.

Braemar ACM’s broad assumption is that about 200m barrels are strategic stock and the remaining is pure commercial stock. The broker’s base case assumes that stock draws will almost completely neutralise growth from a refining throughput standpoint in China.

“So, China’s crude throughput year-on-year will be higher, China’s crude demand year-on-year will be higher, but because some of the demand will be met by stock draws and because there will not be the same level of stock build this year, our assumption is that China’s crude oil imports will be flat for 2021,” Singh said.

Supply picture

On the supply side, nominal supply is expected to be at the “lower end of historic spectrums” for at least the next two years. “We are looking at 2% for clean tankers and flat-to-2% fleet growth for dirty tankers,” Singh said. The current tanker orderbook is about 9% of the fleet, a low level that has been sustained despite comparatively low asset values. “We think that will remain the state of play for another six months to a year,” said Singh.

However, the supply forecast hinges on expectations for removals. The past two years have seen very few tankers removed from the fleet which has led to a fleet profile with a “very large” cohort of 18+ tankers. The weak freight market coupled with strong steel prices could combine to create an environment ripe for recycling of tankers. That said, Singh expected that some of those tankers that might otherwise have been recycled this year could find a home in the sanctions trade, perhaps serving Iran and Venezuela. “Those trades are giving opportunity for these old vessels to find a home,” he said. “There is not too much downside for these vessels to operate in the sanctions trade.” Additionally, these sanctions are not only giving these vessels a place to hide, they are also limiting the options for any vessel with a ‘unclean’ trading history to be sold for scrap.

Singh noted that scrapping is not the only way to reduce the active fleet as Braemar ACM’s statistics report that an ageing tanker fleet leads to substantial loss of utilisation beyond 15 years of age.

Utilisation prospects

Tanker utilisation is now feeling the full brunt of a loss of oil demand. Oil in transit in January-February was about 5-6% below what it was in January-February 2020, according to Braemar ACM. The broker’s near-term projection is that by the end of this year oil demand will still be short of 2019’s 4Q levels by about 1.5m barrels.

But while a full tanker recovery is still out of reach, it is a market of two halves. Singh noted that East of Suez has fully recovered its demand deficit, while demand in the Atlantic basin is not expected to fully recover until the end of this year. “Most of the recovery in West of Suez is likely to happen in the second half of the year as vaccination programs in the West catch up after a slow start.”

However, Singh does not expect West of Suez crude demand to ever return to pre-Covid levels. “The pandemic will leave long running scars on oil demand in the West because the build back will be greener and so much refining capacity has been shut down. As an aggregate this region will need a lot less crude,” he said.

In a brighter note, the recovery in crude demand East of Suez brings the added benefit of greater tonne-miles. “East of Suez will recover to 2019 levels in the second half of this year and that will have a multiplier impact on tonne-miles because most of the recovery will happen in the voyage lanes where the trades are longer. Even as we see global crude imports still below Q4 2019 levels by the end of this year, crude tonne-miles will be higher than those in Q4 2019, so we are setting up for good demand by the end of this year.”

Dirty tonne-miles are currently down about 10% from levels a year ago. Clean tonne-miles show a slightly better picture, but are still down about 5% from a year ago. And within that not all vessel segments have shared the pain equally. “On the dirty side it is the VLCCs that have lost the most amount of demand with the steep drop in liftings out of the Middle East.” In the clean segment the larger tankers have also lost more in tonne-miles than the smaller segments, which according to Singh have been “a little bit more resilient”.
Source: The Baltic Briefing