After a long wait, the turnaround has started
After two years of weak markets, crude oil tanker markets have risen sharply since September. And now, unsurprisingly, we are also seeing the start of an upturn for product tanker markets in some parts of the world.
For a long time, we predicted a gradual turnaround in the second half of 2018 – and we can now see it actually materialising.
As we stated in our Q3 interim report, rates in the VLCC segment have risen from $9,000 per day in early September to listings of about $40,000-50,000 per day during November. Correlation between vessel types is high, and when VLCC started to move, the other crude oil segments followed suit. For suezmax tankers, the rates have more than doubled in a short period – from about $10,000 per day to listings of $30,000-35,000 per day at the time of writing.
Among the main drivers are OPEC’s gradual output increase of between 500,000 and 1,000,000 barrels of oil per day since July. The increase is a direct result of stock levels falling and now occupying levels that correspond to the average for the last five years. Transport needs have also increased as a direct consequence of increased production. For example, the number of VLCC cargoes from the Middle East increased by about 25 percent in October.
First, crude oil – now the product tanker markets
Going by the book, we can now see that the product tanker market is being boosted by more crude oil in circulation. And, after all, it is refined oil products that are ultimately used as energy sources in cars, aircraft and other applications. The upturn in the product tanker market is also taking place from low levels, but it is still a clear upturn. For example, the rates for combination voyages in the Atlantic have risen from $7,000 per day to $15,000 in a short period. At the same time, arbitration opportunities have increased and as we approach winter, we also expect the usual favourable seasonal effects to add further support to the turnaround.
A market moving towards better balance
In parallel with increased transport demand, the phasing-out of vessels through recycling (scrapping) has continued. High scrap prices and impending investment decisions in response to forthcoming legal requirements are the main drivers here.
Looking ahead, we believe that the new sulphur regulations that come into force in 2020 will contribute positively to demand for tanker transport, mainly through changes in transport flows due to increased demand for new low sulphur fuels – but also through continued phasing-out of older vessels.
Strong decline in oil prices
We are often asked how oil prices affect tanker market development and the straight answer is that oil price movements do not have a direct impact in the short term. However, in the longer term, the tanker market, just like industry in general, benefits from low oil prices.
At the time of writing, we have seen the price of oil falling sharply. Since rising sharply in September and October, the price has plummeted in recent weeks, with a decline of about 20 percent since the high in October. This development gives a clear picture of how overreactions in the trading and derivatives markets affect price trends. The upturn was primarily due to the expected consequences of sanctions against Iran, production disruption in Libya and Venezuela, and concerns about the tropical storm Gordon. Sanctions against Iran did not turn out to be as extensive as many first believed, and this, together with increased US shale oil production and OPEC’s increased output, resulted in a decline in oil prices.
The last few years have been tough for the entire tanker market. As we stated in our recently presented Q3 interim report, it is very pleasing that our forecast of a gradual market improvement is now starting to seriously materialise.
Kim Ullman, CEO