Weight of Freight: The third quarter was hard on tankers, is optimism justified?

Author Will Collins, Recycled Polymers Editor

The third quarter for tanker owners was "among the most challenging for our market in recent memory" the chief executive of Belgian dirty tanker owner Euronav, Hugo de Stoop, says.

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The combined profit of 12 tanker owners observed by Argus slipped from just over $200mn in the third quarter of 2020, to a combined loss of nearly $400mn in the same period of 2021. But there was also a common theme of cautious optimism that the “worst” of the post-Covid slump in tanker earnings may be over.

Several reasons for a potentially brighter outlook kept popping up, and closer examination reveals that both “optimism” and “caution” are justified.

Tanker owner 3Q financial results

Relaxation of Opec+ supply cuts

The relaxation of Opec+ supply cuts, with the coalition lifting production quotas by 400,000 b/d each month since August, is boosting expectations in the dirty tanker market.

Dirty tanker owners saw their biggest year-on-year drop in profit in the third quarter, having benefited from the back end of the floating storage boom in summer 2020. Euronav, Bahri and DHT, which own 118 very large crude carriers (VLCCs) and 30 Suezmaxes between them, saw earnings decline by more than $300mn on aggregate on the year.

But higher Opec+ supply means more VLCC trade on the Mideast Gulf to east Asia route, which is the largest single provider of VLCC tonne miles. Stronger VLCC demand can also filter through to smaller segments and buoy the whole dirty tanker market. And global oil demand has largely recovered to pre-Covid levels, with OECD stocks below the five-year range, leading to calls for production increases to be accelerated.

VLCC tonne mile demand

But it may still take some time for the VLCC market to rebalance. Tonne miles remain below 2019 levels, since when the size of the fleet has increased. Mideast Gulf loadings are picking up, but flows on longer-haul routes from the Atlantic basin to Asia-Pacific — which can provide a quicker road to recovery — may take longer to grow.

The US Energy Information Administration forecasts US crude production to be around 3.25pc below 2019 levels in 2022. And the pickup in production of Mideast Gulf crude has also contributed to a wide EFS — the premium of North Sea crude to Dubai crude — in recent months, making it less attractive for Asia-Pacific buyers to bring in Atlantic basin crude.

Opec+ has also resisted calls to expedite production increases to offset tightness in the market. And it may remain cautious, with most observers — including Argus — expecting the oil market to shift back into surplus in the first half of next year with continuing 400,000 b/d monthly increases. Its next meeting will take place on 2 December.

Lower global product stocks

Global gasoline stocks fell to the bottom of the five-year range in September, with middle distillate stocks also below the five-year average. Meanwhile, people and companies have been making use of fewer restrictions on movement by consuming transportation fuel at or near pre-Covid rates, including demand increases in regions such as west Africa and South America that rely structurally on imports. This should buoy clean tanker demand.

Tonne mile demand from clean tanker use is already at or above pre-pandemic levels globally, according to oil analytics firm Vortexa. And Scorpio Tankers chief executive Emanuele Lauro agrees, telling investors earlier in November that he expects “tonne mile demand to exceed 2019 levels over the next few months… and seaborne exports of refined products to increase by over 5pc in 2022”. Another clean tanker owner, Ardmore Shipping, highlighted low product inventories “in particular in the Atlantic basin” as key to supporting recovering demand in this market.

Pickups in clean product demand are certainly a step in the right direction for the clean tanker market, from shipowners’ perspective. But the market continues to suffer from oversupply of tankers. There are nearly 10pc more LRs trading in the clean tanker fleet this month than in November 2019. This is a result of newbuild deliveries and existing Aframaxes cleaning up to trade as LR2s because of weakness in the dirty tanker market. This supply pressure cascades down to smaller classes, with LR tankers muscling in on typically MR business on some routes.

Coated Aframax/Panamax/LR1/LR2 tankers by last cargo carried

And Covid-19 remains spectre at the feast. Infection rates have soared in parts of Europe, despite relatively high vaccination rates, leading many countries to plan full or partial lockdowns that could curb products demand.

Some clean tanker rates have picked up in the fourth quarter, after a period in which certain markets were flatter than the proverbial pancake. This suggests that pockets of higher demand may be starting to cut through oversupply in the market. But this has happened sporadically, and more prosaic factors such as seasonality and higher bunker prices are also at play. A sustained increase in clean tanker rates may need a larger jump in demand, or a recovery in the dirty tanker market that persuades Aframax/LR2 owners to switch back to crude on a long-term basis.

Clean tanker freight rate - selected routes

Refinery rationalisation

Many shipowners operating in the clean tanker market expect refinery rationalisation — which accelerated during the pandemic — to boost tonne miles in the medium to long term.

Refinery capacity is set to concentrate around crude production centres, particularly the Mideast Gulf, putting older or smaller refineries in consuming regions under pressure. For example, four European refineries have already been slated for closure since the beginning of the pandemic, totalling 430,000 b/d of capacity. And Australia was cited by Scorpio, Torm and D’Amico, among others, as a country where recent refinery closures should raise demand for product imports from the Mideast Gulf and/or other Asia-Pacific countries (so far, actual Australian imports have not shown much upward impetus, but the country has experienced tighter lockdowns than most).

The logic is sound, but the concentration of refining capacity in oil production centres can still be a double-edged sword for the tanker market. Every tonne of oil refined at the production centre is lost long-haul demand for dirty tankers, and 2021 has shown how weakness in dirty tankers can weigh on the clean market.

There may also be cases of new refineries reducing clean tanker demand. The start-up of new west African refining capacity in early 2022 is likely to weigh on west African demand for transport fuels from Europe, for example, as well as limiting west African crude exports.

Scrapping, low fleet growth

Expectations of high scrapping and low fleet growth are not new in the shipping industry, but it does appear that a slower period for tanker fleet growth is on the horizon.

Shipowners would struggle to place new orders even if they wanted to, considering yard congestion, and many decision makers remain unclear as to which engine technology they should hitch their wagon. Meanwhile, persistently low freight rates and high steel prices could encourage owners to recycle older tonnage, particularly with tighter emissions regulations taking effect from the start of 2023. This should tighten the market balance as demand picks up.

But the point at which this will meaningfully affect tonnage supply is still some way off. There are still around 47 VLCCs and 44 Suezmax newbuilds scheduled for delivery in 2022, and another 21 and 10, respectively, due in 2023, according to shipbroker SSY.

In addition to joining an already oversupplied dirty tanker market, these VLCCs are likely to concern clean tanker owners, given the propensity for VLCCs to carry clean products on their maiden voyage, and even subsequent voyages in at least one recent example.

Further down the size list, there are 42 Aframax/LR2-sized ships scheduled for delivery in 2022, just slightly below the annual average for the 2017-21 period, and 77 MRs, which is above the 2017-21 average. All of these tankers will enter a market that is still struggling with oversupply.

Tankers scrapped by vessel type

Scrapping has picked up year on year in 2021, but only 16 VLCCs and 12 Suezmaxes have been demolished since the start of January, according to Argus data. High second-hand prices give shipowners an opportunity to sell older tonnage, rather than scrapping, and the continuing presence of sanctioned trade provides a market for older ships.

Several years of relatively subdued scrapping activity have raised the age profile of the fleet, with almost 19pc of product tankers and 20pc of crude tankers set to be 20 years or older by 2023, according to SSY. But given the newbuild schedule it seems unlikely that scrapping will “save” tanker rates in 2022.


There is a strong case to say that the third quarter will turn out to be the deepest point of the recent trough for tanker owners, and earnings should now begin to recover.

More Mideast Gulf crude production will raise dirty tanker demand, which should lift some of the supply pressure on the clean tanker market, where demand is already pushing back to and above pre-Covid levels. And fleet growth — always cyclical — is heading for a slower phase, but this seems unlikely to ride to shipowners’ rescue as early as next year.

Shipowners are right to be cautiously optimistic about the future, but they would be equally well advised to avoid getting carried away.

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