Global oil demand has never been higher, despite recent revisions. Demand is driven by growth in Asia, the Middle East, Latin America and FSU, while requirements in North America and EU are contracting in 2011 as well as in 2012. The IEA has revised down its demand outlook by 0.2 million barrels per day (mb/d) for 2011 to reach 89.3 and by 0.4 mb/d for 2012 to reach 90.7. Growth outlook now stands at a modest 1.1% in 2011 and 1.6% in 2012.
CRUDE
The current VLCC market is in dire straits. Since the beginning of August, average earnings for a modern double-hulled VLCC have moved sideways in the USD 4,000-8,000 per day interval; to this figure can be added the possible savings that can be made by slow-steaming on the ballast leg or agreeing on a longer sailing time than “utmost dispatch” on the laden leg. This is more likely if the cargo receiver is also the charterer of the vessel (FOB-deal). The number of spot fixtures in the Arabian Gulf is at a record high, but so is the number of available vessels.
Last year, a modern VLCC earned USD 37,929 per day, while year-to-date 2011 earnings are down at USD 17,157 per day (minus 55%). Since the turn of the year, the VLCC fleet has grown by 5.2% - twice the fleet growth of the entire last year. Demand has been positive, with a record of fixtures, but the fundamental imbalance is handing the negotiation power over to charterers as available vessels outnumber available cargoes. In order to reverse the sluggish earnings going forward, owners either have to start larger scale slow-steaming or initiate widespread idling/laying up of vessels.
As the current VLCC fleet is only 8 years old on average, the demolition potential is literally non-existent. Just 9 vessels are built in 1990 or before – all of which are single skins. In total only 55 vessels (10% of the fleet) are more than 15 years old.
PRODUCT
In the second half of September the opening of the gasoline arbitrage opportunity provided a much-needed pick-up in activity in the trans-Atlantic gasoline trade from Europe to the US, known as TC2. During the first week of September, rates on TC2 were touching the USD 2,314 per day, while the renewed influx of cargoes to the market shot rates up to USD 7,786 per day. This is a positive development, but earnings are still only able to cover OPEX-cost, and unfortunately nothing more than that.
Without much activity in September, three-year time charter rates for Clean MR tankers improved slightly on the August level, where more deals were done. Spot rates appear to be stuck in the USD 5,000-10,000 per day interval regardless of activity level or seasonality.
Supply:
The active product tanker fleet has grown by 3.2% so far in 2011, as 78 vessels equal to 4.8 million DWT have been delivered, offset by just 1.3 million DWT being demolished (34 vessels). This also supports the trend that goes across shipping segments of large vessels entering the fleet while smaller vessels exit. The average vessels entering the fleet have a cargo capacity of 62,000 DWT as compared to the capacity of 39,000 DWT for a vessel leaving the fleet. The total product tanker fleet now consists of 110 million DWT.
Following 6 years of high fleet growth in the product tanker segment (2004:2010 – 9.4% average), the fleet growth has come down to a more workable, but still elevated, level around 5% growth p.a. This level could prove to be the floor going forward if the recent trend of more vessels being ordered than new built vessels delivered into the fleet is dominant enough to grow the current orderbook in coming years. Note that the BIMCO supply growth outlook is based on existing orders only and does not take into account future orders not placed yet. Without doubt the current orderbook-to-fleet ratio has been affected by poor earning in 2009 and 2010 that has reduced orderings to 2.2 million DWT and 4.7 million DWT respectively.
The active total crude tanker fleet has grown by 4.8% as 23.8 million DWT have been delivered into a fleet consisting of 343.1 million DWT. Out of the total deliveries, 45 new VLCCs have been delivered (13.8 million DWT) adding to the existing fleet of 163.6 million DWT by the start of the year. After subtraction of removals and demolished vessels, the fleet VLCC fleet growth ends at 5.2% so far in 2011.
New contracts on VLCC have been low throughout 2011, with just three vessels ordered in April and another two in July. This is in sharp contrast to the 51 new VLCC contracts signed last year, which is a clear reflection of the earnings made in this segment during 2011 and the somewhat gloomy outlook for the coming years.
Outlook:
Crude oil in VLCC floating storage currently employs a bit more that 20 vessels on a flat development in 2011, which leaves room for improvement. But as long as the forward curve on crude oil prices remains in backwardation, as has been the case for most of 2011, the incentive to use VLCC for floating storage is low.
Moreover, the economic conditions in the large oil consuming regions in the Western hemisphere leaves oil demand growth in that part of the world negative or flat at best. That means present and near-term future oil demand is short-haul demand and not what the tanker sector needs. An example of this is the fact that US seaborne crude oil imports have been south of 5 year-average since February, with a likely seasonal slowdown in coming months.
Despite the initiatives to lower active fleet efficiency by slow-steaming and the like, BIMCO still roughly estimates the level of VLCCs that would need to be made idle is in the range of 40-50 for overall crude oil tanker freight rates to return to a sustainable level from the present doldrums. The trouble is, however, that the Winter market is getting too close now and owners are unlikely to dare missing out on potential exciting fixtures related to a Winter spike. Without the prospect of idling or laying up vessels in coming months, the adjacent downside to non-action is a continuing of the present poor earnings.
BIMCO expects the crude tanker fleet to grow by 7.6% in 2011, adding continued supply pressure on the market. Fleet growth should come down to 7.0% in 2012 but has no material effect unless cargo volumes grow significantly. Four months ago it seemed as if 2012 was to surpass 2011 in terms of crude tanker deliveries. But things have turned around now and more near-term supply-side pressure than originally forecasted is now in the making for crude tankers.
The peak month of the Hurricane season, September, has passed with little effect on freight rates. Hurricane Irene proved to be the only one causing a commotion in the shipping industry, being an Atlantic Hurricane that did nothing to the offshore oil installations in the Gulf of Mexico.
BIMCO expects that freight rates in all crude and product tanker segments will stay at unexciting levels as demand continues to soften and supply is set to move on.