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Rising distillates, Atlantic crude flows may boost tanker rates

Singapore — Clean and dirty tanker freight are expected to be strongly supported in 2020 by the new sulfur cap on marine fuels, boosting volumes traded as well as creating fresh challenges for owners on quality and bunker costs as they struggle to pass on expenses to charterers.

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The dirty tanker sector strengthened in 2019 due to long haul voyages to deliver crude from West to East, while the clean ships benefited from increasing trade flows of gasoil to the West.

Starting January 1, the International Maritime Organization enforced new global regulations lowering the amount of sulfur that ships can emit as they burn bunker fuel on the high seas to 0.5% from 3.5%.

"This is expected to be a game changer because of incremental demand for distillates in a year when fleet growth will be one of the slowest," said Enrico Paglia, a senior analyst with Banchero Costa, a Genoa-based shipping brokerage and consultancy.

Bancosta forecast clean tankers' fleet growth in 2020 to be a paltry 2% compared with an estimated 5% in 2019. Paglia added that the actual fleet may turn out to be bigger if the freight rates boom and demolitions are postponed.

LOW SULFUR, HIGHER FREIGHT

Both the clean and dirty tankers made strong gains in 2019 and the trend is likely to continue in 2020.

The demand for oil is improving after a weak first half of 2019, said Ole-Rikard Hammer, an Oslo-based senior analyst with Arctic Securities.

The crude tankers received a boost when refineries ramped up their production to cater to the projected requirements for distillates while the demand for such refined fuels is only now starting to materialize, Hammer said.

If the price differential between the high and low sulfur fuels widens, older and less economical ships will be sent for recycling, thereby constricting supply.

This could push up freight rates but that may not happen if the spread between bunker grades is small, said Olivia Watkins, head analyst for the UK-based shipping consultancy, VesselsValue.

The Atlantic market will be short of middle distillates in 2020 and the demand will be met from the East of Suez, which will improve the ton-mile demand, analysts said.

Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same, or conversely, it offsets the increase in supply of tonnage.

Large volumes of gasoil are expected to flow from West Coast India and the Middle East to Western Europe as well as the Mediterranean, which will benefit the Long Range and Medium Range tankers, according to market watchers.

Europe could be sourcing more of its gasoil requirements from Asia because the US will be busy catering to the South American and West African markets, said Paglia.

The additional demand for distillates due to the new sulfur regulations is expected to be 2 million b/d in 2020, according to industry estimates.

Bancosta estimated the average daily earnings of MR tankers in the last three years at $12,000, which is expected to rise in 2020.

After a sharp rise in early October due to US sanctions on China's Cosco Dalian, which restricted the availability of VLCCs, daily earnings for dirty tankers have now eased but are still decent from owners' perspective.

VLCCs secured $86,000/day on the key Persian Gulf-North Asia routes in 2018, according to the estimates of brokers, which showed average earnings at around $20,000/day.

FLEET EXPANSION FEARS

Analysts also cautioned against the supply expansion in the tanker sector.

Once the seasonal boost fades in the first quarter of 2020, the high freight rates in the VLCC market are likely to disappear.

The market fundamentals in fact worsened in 2019 with fleet growth of 6.3%, which is an eight-year high, said Peter Sand, BIMCO's Copenhagen-based Chief Shipping Analyst.

Tanker freight rates may recede in the first half of 2020, but the earnings will be substantially higher than the year-before period, added Tim Smith, director of oil and tanker markets at London-based Maritime Strategies International, or MSI.

Earnings may improve in the first three to six months of 2020 but it will be a short term boost in an over-supplied market, Sand said.

A significant part of the dirty tanker fleet is currently away from active trading due to US sanctions on Iran, Venezuela and China; being used as floating storage of both high sulfur fuel oil and low sulfur fuel oil; and installation of scrubbers on ships, Hammer said.

The net effect of these factors after one year is likely to be smaller due to "potential unwinding of situations", implying a higher fleet growth, he said.

Unlike the clean tankers, a large number of crude tankers -- including more than 40 VLCCs -- are slated for delivery in 2020, Bancosta's Paglia said.

ATLANTIC CRUDES - TON-MILE BOOSTER

On the demand side, Paglia said the sulfur regulation will create a large surplus of cheaper residual fuels in Europe. These could be exported to refineries in Asia as feedstock, pushing up the freight rates.

The market share of Atlantic crudes in Asia is also increasing as the US, West African, Brazilian and Norwegian grades undertake long haul voyages, boosting the ton-mile demand, Arctic's Hammer said.

With OPEC deciding to further cut output in the first quarter of 2020, flows will increase from the Americas to Asia, driving up the average distances, MSI's Smith added.

US is likely to become a net crude exporter on an annual basis in 2020, which will further support the tanker industry, Sand from BIMCO said.

-- Sameer C. Mohindru, newsdesk@spglobal.com

-- Edited by Kshitiz Goliya, newsdesk@spglobal.com