TANKERS: Freight rates seen near bottom as demand picks up for Q3

Tanker freight rates in Asia are seen close to bottoming out as demand recovers gradually in the third quarter to move both crude and refined products, market participants and analysts said July 15.

The earnings of owners were severely hit in Q2, to the point there was limited scope for rates to fall further, as demand to move both crude and oil products plunged due to the coronavirus pandemic, the sources said. While subdued demand was likely to continue to keep freight rates within a lower band in Q3, frequent bouts of recovery were expected, they said.

"The market is undergoing a predictable correction after it became clear that the world was not going to drown in oil and fewer ships than expected were needed for storage," said Ole-Rikard Hammer, senior analyst for oil and tanker markets with Arctic Securities. Things were far worse earlier in the year, Hammer noted.

OPEC slashed its crude output to a three-decade low of 22.31 million b/d in June, according to S&P Global Platts latest survey. However, the freight rate on the benchmark Persian Gulf-China route averaged w52.8 in the month, equating to relatively healthy daily earnings of around $50,000, according to shipping industry estimates.

Nevertheless, concerns remain because much of the demand destruction caused by the COVID-19 pandemic was unlikely to snap back, and recovery was widely expected to be gradual.

Despite demand recovering faster in July than had been expected just weeks earlier, many refined products such as jet fuel remain heavily impacted by coronavirus restrictions, said Genoa-based Enrico Paglia, a senior analyst with Banchero Costa or Bancosta, a global shipping brokerage and consultancy.

The cut in crude output and shipments in the first half of the year has also reduced demand for dirty tankers.

The heavy buildup in stocks during the pandemic and the consequent fall in output was now heavily weighing on the earnings of owners, Paglia said.

The number of spot VLCC fixtures in the Middle East was down 34% in June from January-April, when they averaged almost 150/month, according to the estimates of brokers.

Nevertheless, VLCC owners said port delays in China and any revival in floating storage would still keep some tonnage out of the spot market.

FLOATING STORAGE EASING

As millions of barrels of crude and oil products were either stored or stuck in discharge delays in Q2, tanker freight rates hit record highs - and then when this pressure eased, fell sharply.

Global shipping consultancy Maritime Strategies International estimated floating storage for crude hit 43 million dwt end May, equating to around 9% of the dirty tanker fleet of 70,000 dwt ships and above.

Floating storage was expected to decrease across H2 as demand for oil recovers and production declines, Tim Smith, MSI's London-based director, said in a report.

However, he cautioned that this process could be impacted by a second wave of lockdowns - or an increase in oil output, which would imply upside potential for earnings in H2.

The tanker markets, both clean and dirty, were doing well long before floating storage became an issue and any easing of the floating storage situation would not propel the market into a prolonged downturn, Hammer said.

CLEAN TANKER RATES FALL

Clean or product tanker rates have seen a swift 180 degree downturn in fortunes since hitting a record high at end April. Product tankers have been hit hard because apart from storage plays, the sharp tightening of crude supply by OPEC+ has hit refining margins and reduced oil products output, disrupting normal trading dynamics, Hammer said.

Refineries from the Persian Gulf to India and from South Korea to China reduced output in response to the demand destruction wrought by the pandemic.

As export shipments dry up, there are more than 100 LR1 and 100 MR tankers available for loading this week in North Asia alone, and earning for owners are close to breakeven levels, according to industry estimates.

Vessel supply is also on the rise - the Medium Range fleet grew by an estimated 2.6% in H1 and the annual growth for 2020 is projected at 4%, Paglia said.

However, Hammer contended that refinery margins were close to bottoming as oil demand edged higher in July and the outlook for the rest of Q3 was positive.

The problem for refiners is that with more capacity coming on stream, oversupply of products was likely to persist even as underlying demand recovers, MSI's Smith noted.