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SHIPPING: Global tankers Q4 freight, earnings to rise as demand strengthens


Increased OPEC+ output key to higher freight

Slow ship demolition to cap gains

Sustained recovery still elusive

  • Author
  • Sameer C. Mohindru; Vickey Du
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Oil Shipping

Global tanker rates are likely to recover in the fourth quarter of 2021 as easing of coronavirus-related lockdowns pushes up demand amid declining imported stockpiles and rising energy prices, but slow scrapping and ample supply of ships will cap gains, market participants said.

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Asian VLCC freight is currently hovering around a nine-month high, having breached above the key 40 Worldscale points mark for the first time since early January.

"Tankers are cyclical and so from current dismal levels the only way is up. The question is when and how much," Ole-Rikard Hammer, an Oslo-based analyst with Arctic Securities said. Oil demand may increase strongly in the coming months as vaccinations in emerging markets catch up with developed nations, he said. The gap between oil demand and freight volumes is large and inventories are falling rapidly, he added.

UK-based consultancy, Maritime Strategies International, or MSI, forecast daily average spot VLCC earnings during the fourth quarter at $19,000, taking into account voyages to China from the US and Persian Gulf, compared with losses of $400 in the previous quarter. It forecast the LR2 earnings on the Persian Gulf-Japan route to double quarter on the quarter to $12,000.

However, this may not be enough. For owners to breakeven, they need daily earnings of $20,000-$25,000, a chartering executive said. For this, they need to get w45-w50 on the Persian Gulf-East Asia routes, if low sulfur bunker prices are around $575/mt.

Hammer pointed out that amid rising prices, OPEC+ may raise crude output by more than currently planned and tanker activity may increase ahead of winter.

From next month, OPEC+ plans to increase crude output by 400,000 b/d every month until at least April 2022. Even before the first incremental tranche of 400,000 b/d, the sentiment is firmer due to a lack of quality ships, and freight may rise further when the extra barrels enter the market, a source with a VLCC owner said.

Brent crude prices of over $80/b are at a three-year high. According to the Energy Information Administration estimates, petroleum consumption is expected to surpass the key psychological mark of 100 million b/d mark only in December, up from 98.4 million b/d in August, and may remain above that level for the whole of 2022.

If demand rises in line with EIA's projections, "we are probably already seeing the light at the end of the tunnel and consumption next year should be roughly at the pre-pandemic levels of 2019," said Enrico Paglia, a Genoa-based research manager with Banchero Costa, or Bancosta.

Oil tankers are better positioned for recovery with "more meat on the bone" as demolition was record high, oil prices are rising and bringing more arbitrage trades along, added Peter Sand, Bimco's Copenhagen-based chief shipping analyst.

Demolition, newbuilds

The problem is that last year the dirty tankers' fleet grew by 3% and by the same levels in the nine months through September, hence the supply is already a lot bigger than at end-2019, Paglia said.

Slow scrapping of old ships has kept tanker supply rising through the pandemic, so the market has some additional availability to offset but freight is likely to still increase more than just cover rising costs of bunkers, said Hammer.

Bancosta estimates show that the clean tankers fleet also grew by 3% last year but deliveries slowed down considerably to just 1.2% so far in 2021.

Paglia pointed out that unlike dirty tankers, where only four VLCCs and two Suezamaxes have been scrapped so far this year compared with almost 50 total new deliveries, demolitions of more than 40 clean tankers is significant. He said even in Aframaxes, where just over 20 units have been scrapped this year, the deliveries are almost double of this number.

Scrapping of VLCCs is "way too little to have a real impact on the market balance", said Bimco's Sand.

Bancosta forecast further stepping up of dirty tankers' deliveries next year but a slowdown in clean Long Range II fleet.

Bleeding losses

Nevertheless, analysts also sounded a note of caution. "We can always rely on winter spikes but those are false dawns as fundamentals are not strong enough to call it a sustained recovery," said Sand.

China's historic decision to sell crude from its state reserves is reflective of high prices and scarcity and further reinforces the view that cargo volumes are under substantial pressure, MSI's London-based director, Tim Smith said in a report.

China is the world's largest crude importer and its average shipments are equivalent to four to five VLCCs daily.

Easing of lockdowns was good but oil demand primarily in the Organization for Economic Cooperation and Development countries still lagged behind pre-pandemic levels and the main driver -- non-OECD -- still struggles to keep demand up, "as the virus keeps biting", Sand added.

VLCC market is also concerned over demand uncertainty due to power supply shortages in China. If China's demand for VLCCs is not hurt by China's power outages, freight will be firmer in this quarter, a tanker broker said.