The crude tanker market has so far this year conformed to expectation in most key areas, although hope that fleet growth remains in check hang in the balance, and oil supply volatility is a dominant feature that is likely to loom large through to the end of the year.
The very large crude carrier (VLCC) market continues to provide a barometer to the climate in the dirty tanker market in general, and the beginning of this year provided owners with a windfall as rates on all major routes soared. Taking the long haul Mideast Gulf-Asia Pacific route as an indicator, rates hit a high of Worldscale (WS)73 or $18.87/t in January this year, against a low in January 2013 of WS30 or $8.24/t. When adjusted to take account of a dip in Worldscale flat rates in 2014, this equates to around WS32.50, or $8.40/t.
VLCC earnings on a timecharter equivalent basis peaked in late 2013 to average around $50,000-60,000/d, and while they eased back to around $30,000-35,000/d by the end of January this year, shipowners were at least starting the year in good shape.
But before the end of February, earnings were already down to around an average of $15,000/d, and have dipped to a low of under $10,000/d in the interim, before recovering since the end of May. Earnings calculations are an inexact science based on the range of assumptions underlying them, but broadly speaking, rates could still be on course to come out at around $18,000/d for the round-voyage Mideast-Gulf east, in line with predictions at the end of 2013.
The Suezmax sector was the direct beneficiary of the strong VLCC market earlier this year, while Suezmax demand was independently supported by continued strength in the west Africa tanker market, as charterers replaced Libyan oil supplies. The Aframax sector had its own supportive dynamics to start the year, as weather-related delays in the north of Europe and the Mediterranean caused rates to spike.
Market analysts predicted a cooling off in the VLCC sector, which had been arguably over-hyped in the second half of 2013, as Asia-Pacific pulled oil in from all areas. Rates on the Mideast Gulf-east route retraced to a low of WS32.50 or $8.40/t at the end of May, but are back in the WS45-50 range around $12-13/t in July. All sectors of the crude tanker market fell in February and March, returning to the more usual cycle of demand-driven peaks and troughs.
But the spike in rates and earnings to start the year re-ignited interest in tanker ownership and as many as 24 VLCCs were ordered in the first quarter, compared with a total number of deliveries in 2013 of 27-30, according to a report in June by shipbroker EA Gibson. A sharp slowdown in orders in the second half of 2013 was reversed, although inevitably the fall in rates has since slowed down the rush to order new ships.
Scrapping activity has not kept pace with expectations. Low earnings and a large order book have encouraged scrapping, but activity in this area has been low, Gibson said. The current scrap value of a VLCC is around $20mn, just $1mn less than the value of a 15-year old tanker. But despite this, just six vessels have been scrapped so far this year.
Shipping analysts agree that a recovery in longer term earnings will be harder to achieve if the growth of the VLCC fleet is not kept in check. "Top tier yardspace is full up to 2015-2016, with 80-90 VLCCs on order," one London-based analyst told Argus. But the scrapping rate could still increase to counterbalance the increase in the fleet. Owners are obliged to pay for a survey of tonnage every five years, and increasingly, ships above 15 years old become a borderline case based on the cost of the survey and ongoing maintenance. And as more charterers draw the line on the acceptability of ships – as in Japan – at 15 years, there will be increased natural wastage in the fleet.
Tanker owners continue to try to find ways to restructure, and to manage their exposure to the vagaries of the tanker market. But so far a general return to long-term prosperity has yet to emerge. But in at least one headline case this year, a shipowner decided to increase their presence in the crude tanker market, as another decided to pull back. Belgian-based tanker owner Euronav acquired 15 VLCCs from Danish firm Maersk Tankers in January this year, and a further four which Maersk had been managing on a bareboat timecharter basis, and bought from their respective owners to sell on to Euronav.
Maersk still has two VLCCs on bareboat charter but plans to exit the crude tanker market entirely, to focus on the products sector. But Euronav's acquisitions increased its VLCC fleet to a total of 31 ships, one of the largest in the global market, and underlines the view — among some owners at least — that the crude tanker market, particularly the long haul market, is a sound prospect.
Looking at market fundamentals, a lifting of the ban on US crude exports was widely dismissed as unlikely in 2014. But a partial step towards it was within analysts' sights at the start of this year. The granting of export licences to two US companies to allow them to export distilled condensate is widely seen as the first tentative step towards an eventual change in the US position on crude exports.
US independent Pioneer and midstream firm Enterprise were granted licences to export lease condensate from the Eagle Ford shale field in Texas, which has undergone processing in a distillation tower, but has not been run through a splitter. Lease condensate is classed as crude oil under US law and is subject to the export ban, but the new ruling allows the lightly-processed condensate to be exported as refined products.
Such a small scale and restricted relaxation of the legislation does not yet represent a sea-change in the supply of global oil. So far Panamax shipments of just 50,000t are expected, which will be a boon to owners of the smaller dirty tankers, but the impact will otherwise be limited. A knock-on effect will be the emergence of a so-called "back-haul" route for Panamax ships loading condensate in the US Gulf to Europe, rather than ballasting to Europe to pick up VGO and fuel oil cargoes, as is the standard option for Panamax ships.
It is unclear whether there will be any significant developments within the current US government administration. But at this stage in the year, analysts are not predicting any structural impact on the tanker market in 2014.
Crude tanker markets have been affected so far this year by a range of political trouble-spots which have disrupted the flow of oil exports. Libyan supply has been sporadically interrupted, and while currently increasing, progress is fitful and a net decrease in exports could continue for at least the rest of this year. The Aframax sector is most affected by a drop in Libyan exports, but earnings this year have received an intermittent boost from significant delays caused by stormy weather, most notably in Europe's Atlantic ports, and in the Caribbean.
Disruption to loadings of Iraqi Kirkuk crude has further hit the Aframax sector hard, with Suezmax ships also losing a regular source of employment. The flow of crude through the Kirkuk pipeline to Turkey's Ceyhan stopped in March with no confirmation yet of when exports can resume. The attempts by the Kurdistan Regional Government to establish their own exports from Ceyhan are well documented. But with only one cargo successfully delivered, there is no expectation that a steady flow of oil will soon be established. Wider political problems in Iraq leave more question marks over the prospect for oil exports returning to normal levels, beyond the damage to the pipeline which first disrupted Kirkuk loadings, and is another of the uncertainties hanging over crude tanker markets.
The rest of this year will be characterised by uncertainty and volatility. Global oil demand will continue to grow, and tanker markets will benefit specifically by steady growth in demand into China. The recent tipping of Brent crude markets into contango should increase the demand for crude priced against Brent and at least in the short term will keep west African crude in high demand, both into Asia-Pacific and – at least in the near term – into Europe. The boost to tonne mile demand on long haul routes is good news for VLCC and Suezmax owners, and should positively affect earnings for the rest of 2014. An increase in tankers being leased on timecharter and used for floating storage is another potential effect of the crude contango, which would again benefit owners by tightening up the supply of ships available for spot voyages.
"No-one wants to say what is going to happen for the rest of the year" one Japan-based broker said. "There has been much more volatility this year than in recent years," and while it may be too soon to say the tanker market is over the worst of the recession-led slump both in volume and earnings terms, 2014 could still represent a better year overall than 2013. But in the final analysis, the only certainty is uncertainty.
jcw/et
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