Tanker shipping

Recent developments and the main future scenarios for the tanker market. Forecast in 2017

Historically, OpenSea users were mainly coming from the dry bulk sector, however, nowadays we observe growing interest from companies and professionals of the tanker industry as well. That is the reason that we decided to analyze the recent challenges in this competitive market and evaluate its trends for 2017.

Last year, global seaborne crude oil trade grew by an estimated 4.3% to 39mln bpd while the clean products oil trade grew also by an estimated 4.4% to 23.1mln bpd. However, during the 2016 year, the tanker market experienced a considerable slowdown in both the crude and clean product segments. The annual average spot earnings of the VLCCs were estimated at about $41,400/day in 2016, much lower than the $64,800/day which was the average for 2015. Same for the clean MR tankers where the average spot earnings for 2016 were about $12,100/day, much less than the $21,400/day in 2015. Table 1 shows that the situation was not different in the other segments (Suezmax, Aframax, Panamax, LR1 etc). How is this phenomenon explained? The answer is given by the growth of supply. During 2016, the delivery of newbuilding tanker vessels expanded the crude fleet by about 6.5% and the product fleet by about 6.1%. This oversupply influenced the market equilibrium and affected the vessels’ earnings accordingly.

table shows supply/demand & tanker market performance 2015-2016

Source: Clarksons
The average earnings of Product Tankers refer to MR tankers only

While a recovery took place during the last month of 2016 and the first days of 2017, the market has experienced a further slowdown recently. Everyone now is wondering what is going to happen next and the environment looks quite uncertain. To get a clearer picture of the short terms prospects, we have to focus on the expectations of supply and demand.

Crude oil production cuts create uncertainty

On late 2016, the OPEC group announced a cut in the crude production of 1.2 million bpd during 2017. According to estimates of OPEC and IEA (International Energy Agency), in January 2017, OPEC achieved a compliance of more than 90% as compared with its planned output cuts. However, the potential for non-compliance during the rest of the year, given the group’s historical record, is not small and it creates high uncertainty. At the same time, Iran is exempt from the cuts as it seeks to restore production back to levels similar to those of the pre-sanctions period, supporting the positive expectations for Iranian crude export growth in 2017. However, the overall, current projections for total Middle Eastern seaborne crude exports indicate a fall of about 1% in 2017. On the other hand, Nigerian and Libyan crude exports, which are both affected by disruptions, are exempt from OPEC production cuts, but the extent of any potential recovery in their crude output is currently unclear and looks not very possible. If the disruption problems were resolved, these two countries could add additional crude exports in the global seaborne trade, but the current prospects indicate that Nigerian and Libyan crude exports will remain depressed during the whole 2017. Exports from OPEC countries represent about 60% of the global and therefore these cuts can affect the world trade the most. However, along with the OPEC members, several non-OPEC countries agreed to cut their oil production as well in 2017. However, it remains uncertain whether these countries, like Russia, will comply with cuts, though the current projections indicate a drop of about 1% on the seaborne crude exports of the Former Soviet Union in 2017.

The crude oil production cuts create a similar uncertainty also with the imports for crude oil. In case the OPEC and other countries insist on their production cuts, the oil prices will further increase in which case USA will increase its investments in the shale oil industry. If the shale oil production is increased, the USA imports will be decreased up to about 10%. Also, these higher oil prices will lower the imports of the European refineries since their profit margins are smaller and subsequently the importing activity may also be negatively affected. Therefore, we see that all the uncertainty in the oil industry arises out of whether the production cuts will be applied in full or not.

Although there is a large degree of uncertainty surrounding crude oil production in 2017, which will definitely affect exports and imports, the current projections for the global crude oil exports speak for a growth of only 0.2% which is a major slowdown as compared with the trade growth of 2016.

Increased oil prices affect the seaborne trade of clean products

The cut of the crude oil production will result in an increase of the cost for oil products. In this case, since the profit margin of the refineries will be lower, a drawdown in inventories of key importer regions, such as Europe, is rather possible. According to IEA, in 2015 and 2016, OECD (Organisation for Economic Co-operation and Development) European product inventories rose firmly, reaching the 593mln bbls in July 2016, 20% higher than the inventories of two years earlier. Under the current circumstances, it is expected that these inventories will be decreased steadily in 2017, which could limit products imports. Therefore, the current expectations for European seaborne oil product imports are for growth of just 1% in 2017, compared to an estimated 7% growth last year. Same story with the Indian oil product imports which are expected to increase by a rate of 8% in 2017; a rate which is much slower than the estimated 36% increase in 2016. On the other hand, Chinese oil product imports are projected to decline 5% in 2017 as the domestic production is expected to expand further and create a domestic oversupply.

In view of the above lower global demand for clean oil products, the seaborne products trade is currently projected to slow down and grow by only 1.8% in 2017, much lower than the growth trade of 4.4% in 2016.

The newbuilding deliveries create oversupply

As shown in the below two graphs, the tanker orderbook still remains above 10% as a percentage of the current fleet while the new deliveries experienced a growth during 2016 which, as we mentioned, was the main reason for the slowdown of the tanker market during the last year. Specifically, as far as the crude tankers are concerned, after a fleet growth of 2.7% during 2015 and 5.8% during 2016, it is expected to grow by about 5.2% during 2017; a growth which is very similar to the relevant growth of 2016. On the other hand, product tankers fleet, which grew by about 5.7% in 2015 and 6.4% in 2016, is expected to grow by about 4% during 2017.

Graphs with tanker fleet & orderbook and oil tanker supply trends

Source: Clarksons

Oversupply will hurt the market during 2017 – Forecast Scenarios

The supply is not expected to surprise us at the end of the day since the orderbook is known and any slippage or cancellations will not create a big difference. Same with scrapping activity since the age profile of the tanker fleet is low in general (only 20% of the crude fleet and only about 18% of the product tankers fleet is older than 15 years old) therefore, the performance of the tanker market will highly depend on the production cuts of the producing nations.

Therefore, the main scenarios are the following:

Positive Scenario: The output cuts are abandoned in the middle of the year in front of the increased competition between the nations which are trying to take advantage of the better prices by increasing their production. In this case, the compliance of the non-OPEC countries is almost zero while the OPEC countries comply at levels of about 50% or even lower. Also, the Iranian exports have been highly recovered while the shale US exports have also been increased during the period of the output cuts. In this case, the demand remains at levels of about 3% (lower than in 2016 due to the cuts of the first half of the year) however the market will remain at about the same levels (as in 2016) since the supply growth will also be lower.

Neutral Scenario: The producing nations comply with the output cuts however with looser compliance. Especially the non-OPEC countries maintain a limited compliance of about 40% on the output cuts during the year, while the compliance of the OPEC countries is maintained at average levels of about 80%. The Iranian improved exports and the increased USA exports boost the total demand which is grown at levels of about 1% (both crude and products). Even in this case, the oversupply will be high and the earnings of the tankers will be less than in 2015 in average.

Negative Scenario: The producing nations comply with the output cuts. The OPEC countries continue the compliance with more than 90% on the output cuts while the non-OPEC countries comply with more than 50% (it was about 48% in January according to IEA). In this case, the demand growth will be zero or even negative if the shale oil industry is not enough to support the market. In this case, there will be an oversupply of more than 4% and will drop both the crude and products market at lower levels than in 2016.

At the moment (February 2017), the crude oil price has already reached a level of about $53 which is the highest since July 2015 and if the production cuts are increased, the oil price will go even higher which will definitely affect the demand for seaborne transport. In any case, it seems that the uncertainty on the demand side is very high which may also boost the market volatility during the year. However, the overall prospects are not optimistic since the oversupply will definitely negatively affect the market. So we strongly encourage shipowners to be prepared for the worst scenarios, begin working on the strengthening of old ties and think about establishing new ones. Nowadays, it is very easy with the help of OpenSea, as you need only to place your open tonnage in the marketplace. This way, you will keep an eye on the new inquiries placed by Charterers and you will be immediately notified by email when a matching shipment arises. This way, we help our customers get best offers ahead of their rivals, find new clients fast and as a result - become more efficient.

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