The global tanker markets are likely to stay weak in the third quarter due to the significant slowdown in trade flows, which will take several months, if not years, to recover, market participants said.
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Freights are already low, and earnings have dissipated and unlikely to recover anytime soon, market participants said. The slowdown in demand caused by the pandemic has shown a marginal recovery but not enough to bring around a turnaround.
Tanker demand has been pushed back by at least five years while the fleet is still expanding, said Oslo-based Ole-Rikard Hammer, a senior oil and shipping analyst with Arctic Securities. The feeble market over the past year reflects this overcapacity, Hammer said.
The average daily VLCC earnings on the benchmark Persian Gulf-China route are close to $4,600 so far this year, slumping from the 2020 average of almost $48,000, according to brokers' estimates. If the average daily operating costs of $22,000 are factored in, there were decent earnings last year but heavy losses in the first half of 2021, a VLCC broker said.
The main factor behind the low freight is the slow return of oil demand in Europe and the US, said Copenhagen-based Peter Sand, BIMCO's chief shipping analyst.
Even as demand declined, newbuild VLCCs continued to be delivered, said Genoa-based Enrico Paglia, a senior shipping analyst with global shipping brokerage and consultancy Banchero Costa.
About 75 new dirty and 95 clean tankers were delivered last year, and the corresponding figures for the first half of this year are 57 and 53, estimates from UK-based shipping consultancy VesselsValue showed. This showed that there is no respite from incremental supply.
To be sure, there have been demolitions, but they are few and far between. VesselsValue counts eight such dirty tankers going to the scrap yard last year and 11 so far this year. The corresponding number for clean tankers is 19 and 22. Only four VLCCs have been scrapped in 18 months, while almost 60 new deliveries have been made, it said.
Worryingly, new orders are rising, aided by rising oil prices as during the first five months of this year, almost 50 dirty tankers including 30 VLCCs were ordered compared with just 27 in 2020, including a dozen VLCCs, added Paglia.
The supply adjustment that happened in previous years is missing this time around. In 2018, a weak freight market resulted in 20 million dwt tonnage being taken out for demolition compared with hardly two to three million dwt in the last 12 months, despite rise in steel prices and a negative oil outlook, said Hammer.
A few market participants attributed this to greater use of handicapped ships for sanctioned trades involving Iran and Venezuela, which could not be confirmed.
The dynamics does not favor owners and operators. Oil prices have been in backwardation for some time now and tankers used for storage last year are still coming down while newbuilds also are getting delivered, added Sand.
However, Paglia said ships employed for storage rose in June but since this was done privately, it has gone unnoticed.
Dirty to clean
A consistent entry of dirty tankers into the global fleet also means that they are deployed for moving clean cargoes in their first voyage, thereby eating into demand, Sand said. The almost 60 VLCCs delivered since the beginning of last year can notionally carry volumes equivalent to the capacity of 185 LR2s, though clean cargoes are also now difficult to get.
The impact of a poor dirty freight market on the clean segment is not restricted to just maiden voyages in newbuild ships. Close to 100 dirty tankers, mainly double coated Aframax-sized ships, have turned clean since last year, adding to an already large supply of LR2s.
The LR2 freight has been mostly poor in all regions for most part of 2021 and current earnings are estimated by brokers at less than $100/d, due to which owners are running into losses and making loan repayments from their own pocket.
While it is common for dirty tankers to undertake their maiden voyage by loading a clean cargo, Bancosta's Paglia said it is worrying that dirty newbuilds are trying to trade as long as they can in the clean segment due to the poor state of their own sector.
"Such a level of intrusion is fairly new and terrible for the product tankers."
Slightly positive outlook
A strong recovery in oil demand and lower inventories is laying the foundation for a rebound in trade for the rest of the year, said Arctic's Hammer. Trade flows should definitely expand and trigger more freight activity on firm oil prices during what is expected to be a strong travel season, he said.
Lockdowns have eased in recent weeks in several countries and more such relaxations are in the offing due to multiple national COVID-19 vaccination programs, which are happening at a feverish pace.
A further one to two million b/d increase in OPEC+ crude output can result in a healthier tanker market but unless there is a supply-side adjustment, rates are unlikely to quickly return to prepandemic levels, Hammer added.
The supply side of tankers remains a concern. Paglia said the current order book is 9% of the global trading fleet.
Another loss inducing factor is bunker prices, which have been relatively expensive at a time when freight is low, BIMCO's Sand added.