TANKERS: Teekay looking to oil demand hopes, lean order book for 2021 freight recovery

Despite a dismal near-term outlook for dirty tanker freight, Teekay Tankers expects rates to firm in the second half of 2021 and into 2022 as the market looks toward a historically bullish order book, coupled with rebounding crude oil demand and global inventories to rebalance the tanker trade, the company said in its fourth-quarter earnings call Feb. 25.

"We are confident that the oil demand environment will rebound in 2021," CEO Kevin MacKay said in the call. "The challenge is really the timing of everything as so many elements come into play that, down the line, will impact freight rates."

Like other tanker market participants, Teekay is expecting that further rollout of COVID-19 vaccines will provide an upside to refinery throughput, and therefore crude tanker demand, in the second half of 2021, with the company referring to US Energy Information Administration estimates that show global oil demand to rise 5.5 million b/d between Q1 and Q4 2021.

But in the first half of the year, the company expects demand to be stifled by a resurgence of coronavirus cases that have prompted further lockdowns and travel restrictions in Europe, Asia, and Latin America.

On the supply side, talks of OPEC+ returning crude oil production back into the market in H2 2021 has Teekay hopeful for increased charterer inquiry. OPEC+ recently cut 1 million b/d in production for February and March, limiting the movement of crude out of the region. Global oil supply in Q4 2020 was at 92.3 million b/d, 8 million b/d below pre-pandemic levels, Teekay said.

The unwinding of floating storage that was booked up mostly in April and May has almost come to an end, MacKay said, which is further adding to expectations that oil charterers will need to return to the spot market to hire ships to move barrels to refineries. At the end of January, offshore crude stocks had been drawn down to 148.8 million barrels, including 35.6 million barrels sitting offshore China, down from 341 million barrels during the height of the floating storage boom at the end of May, according to S&P Global Platts Analytics data.

Teekay pointed to US crude inventories that have returned to the five-year average for the first time in three years as a sign of a dwindling buildup of global stores that have kept tanker demand muted.

Freight for the benchmark Aframax 70,000 mt US Gulf Coast-UK Continent run has averaged $13.68/mt so far in Q1 2021, up 26.3% from Q4 2020, when it averaged $10.83/mt, but down 63.7% from the same period in 2020. Teekay reported average rates earned through both Aframax spot and time charters of $10,000/d in Q4 2020 and $11,400/d in the 73% of Aframax days so far in Q1 2021.

There has been a similar story on the Suezmax side, which has seen freight for the 145,000 mt USGC-UK Continent run jump from an average in Q4 2020 of $6.05/mt to $7.74/mt so far in Q1 2021. Total earnings for Teekay's 75% of Q1 2021 Suezmax hire days has been $18,900/day, up from $18,200/d in Q4 2020.

Bullish order book to bring upside

All shipowner eyes are on a historically bullish order book to keep rates afloat with expectations that newbuild requests will slow amid the uncertainty of future environmental regulations, rising newbuild prices, and an unfavorable financial landscape all of which provide a disincentive for shipowners to buy new ships.

There was a slight uptick, however, in newbuild orders in Q4 2020, especially for VLCC and Medium Range tankers, with a third of all newbuild orders for 2020 signed in Q4, S&P Global Platts Analytics data shows.

Teekay is not concerned that the recent interest will remain, as the company feels the market has room to absorb increased ordering with the current order book at a 24-year low or 8.1% of the overall global tanker fleet, the company said.

Additionally, scrapping rates are expected to rise as weak freight dynamics and environmental restrictions leave shipowners with pressure to rid themselves of older tankers.

Teekay Tankers currently has a fleet of 52 double-hull tankers, including 26 Suezmaxes, 17 Aframaxes, and nine Long Range 2 tankers. The company also owns a VLCC through a 50%-owned joint venture.