Argus and DS Norden team up to explore the clean tanker market in this latest episode in the Weight of Freight series.
John Ollett, Deputy Editor - Freight, Argus and Søren Tolbøll Nielsen, Head of Chartering, DS Norden discuss the ups and downs in the clean tanker market, including the pressure on rates, disruption in the US Gulf market, demand for jet fuel and the potential for a surplus of tankers in the future.
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|Søren Tolbøll Nielsen
Head of Chartering
Deputy Editor - Freight
Argus Freight Market Highlight
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John: Hello there, and welcome to "Weight of Freight," a podcast series where we look at the intricate and powerful connections between freight and commodities. In this episode, we'll be focusing on the clean tanker market, and we're lucky enough to be joined by Soren Tolboll Neilson, Head of Chartering for the Norient Product Tanker Pool at Norden. Welcome.
Søren: Thanks for having me.
John: So, today we're going to be talking about the clean tanker market, which has certainly seen both extreme highs and extreme lows in the last couple of years, ranging from the storage-driven boom in the early 2020s to the lows that we've seen this summer. And while there have been some extreme lows. It's been a rough year so far, Soren.
Søren: It has indeed. It's been, for product tankers, I think the worst year I can remember the past, yeah, the past 15 years. So, it's been nothing we've seen before. For the majority, it's been rough.
John: Yes, incredibly. And especially in the MR market we've noticed, there's been...sort of, we've seen quite an increase of ton miles from Europe compared to 2020, but there still seems to be an awful lot of the pressure on rate.
John: What do you feel has driving the market down?
Søren: Yeah. I mean, despite the decent cross-Atlantic activity, the rates, they have been under pressure by a steady flow of VLCCs and Suezmaxes carrying CPP into the Atlantic. So, it goes back to the whole de-stocking and less demand scenario where the crew tankers, they have moved into the product space. If we look at the LRs, then it's probably 10% more code of LRs in the clean trade today compared to before COVID. So, it shows that a lot of these tankers, usually in the crude segment, has moved over and cannibalizing there. So, all these vessels, they especially defrauded the U.S. Gulf markets, and consequently obviously intensified the MRs to stay in Europe. Further, to that, most of the year, the far east market has been under tremendous pressure as well, so there has been no real escape out of the European market. So, that's been the major issue this year, on the MRs at least.
John: Yeah. And we've seen VLs carrying products from eastbound as well, especially if it's their first cargo when they've come out of the yard. A lot of that has added pressure in the first quarter of the year, and I suppose a lot of those ships will also be coming out in the fourth quarter of this year and the first quarter of next year. Do you see that, sort of, maintaining pressure on the market?
Søren: Yeah. We believe there will still be pressure on the market for the rest of the year, for sure. Obviously, the West Africa has been a pertinent, important factor for the MRs in Europe, and we simply haven't seen a lot of those moves because it's been supplies on the bigger vessels from the east instead. So, before we see a real improvement there in the MR space, the crude space has to improve for us to avoid these ships coming out of the Arctic and clean products west instead.
John: Yeah, the crude market has been under quite a bit of pressure as well. I know that OPEC recently pegged this year's demand at about 96.6 million barrels a day, which is about six million under last year.
John: And so, it's hoping for about 3.3, I believe, going up into next year, so at least we're seeing a potential increase there in crude. But it doesn't quite seem to be increasing fast enough to generate the volume, product volumes.
Søren: No. And I think the product...the problem there has probably been in the east. I think in the west, looking at demand, it's not all the way back from pre-COVID, but I mean, we're getting fairly close. So, that's not the problem. I think the problem is that the supply is lagging behind. So, even though you might have the demand, then everything has been taken from the stocking that went on in early 2020, and the de-stocking is only now coming back to pre-2019 levels. And that's basically what we, I guess, have to wait patiently for, is that the stocks are so low so we will start to see these cargos going into the swap market again.
John: Mm. Exactly, yeah. I mean, we've seen in Europe, some of the refinery runs have started to pick up. You know, they were very low, sort of, you know, March, April, May, June. But definitely in July they've picked up to, sort of, 9.2 million barrels a day, I think, was the last thing we saw.
John: It's still under that, sort of, 2020 level, which averaged about 10.5 million. So, it's still under those figures, but it is pushing up. And yeah, so we're seeing a lot of products on the water.
Søren: Yeah, yeah, yeah. I mean, that's not the problem we've seen. I think at the moment there are just as many MRs on the water than there's been before. Had it been a normal year, and I know there's a lot of inefficiencies here due to COVID, but had it been a normal year, you know, it would have been a decent market for...in the product space and for the MRs. But the problem is just that there are so many Bigger vessels going into this segment cannibalizing. And then we are talking about, we're almost back to pre-COVID levels, but we also have to remember that probably the fleet increased by 6 or 7% since then. So, we need to go even higher.
John: Right. And how significant has the lack of jet fuel been as a cargo? Has that been a big loss for the tanker market?
Søren: It has, especially in the beginning of the pandemic where we saw the demand for jet fuel disappearing almost completely anywhere in the world. We are seeing, especially the U.S., coming back there and have seen an uptick in jets jetting across the Pacific. So, that will help the tanker market, for sure, that is slowly coming back. But that's been a major disruption, especially in the beginning.
John: Yeah. And you mentioned the surface of new ships that we've seen being built. The order books have been coming down, do you think that will mean the fleet will tighten in the future?
Søren: In the future? Yes, but I mean, we still have the next couple of years with the, I think it's 6% coming. So, we still have...it's not a disaster, but we still have quite a big amount of tankers hitting the market here in the next couple of years. But going forward, looking further ahead, then obviously the yacht space has been taking over now from containers and dry cargoes, and it will probably be more difficult to find new builds in the future, putting pressure on the market. And then we have to remember, the tanker market is a very old market. So, there will be a natural amount of scrapping coming as well. We've seen that pick up the last couple of months also, if you look at the amount of vessels.
John: Yeah, the handysize market in particular is quite old, isn't it? And we've seen the, as you mentioned, we've seen the MRs going in and cannibalizing the handys.
John: And that, do you think that's a trend that's going to continue?
Søren: I think so, and we've talked about the MRs have had a difficult year, but then we haven't talked about the handys yet because the handys have had a terrible year. And obviously, there's been not a lot of escape for the handys trading, especially in the European markets. And in a low market like this, then the LRs have been cannibalizing on the MRs, and the MRs has cannibalized on the handys, and the handys have had really nowhere to go. So, that, it's been a problem for the handys. And on the other hand, though, as you mentioned, this is an old market, but there's nothing new coming in to the market. So, a very limited amount of handys being built, so there's no additions. So, as such, it'll probably remain as an interesting niche market, at least also in the future.
John: Yeah. Yeah, I mean it's a trend that we've definitely noticed in the last two or three weeks. You know, almost every MR that's book on a transatlantic journey from the UK continent to the U.S. is also including a cross-UK continent, or if it's coming out of the Mediterranean, a cross-Mediterranean option. So, charters are having that option to use them for handysize cargos instead. And I guess that's even further eating into the rates and adding to the pressure that we've seen.
Søren: Yeah. And I think there are two reasons for it. Obviously, in a market where the owners, they're under pressure, the charters, they can demand more options, and will get it. You're probably also seeing now that most owners probably don't mind going short since we are reaching year-end, closer to that at least. And also sending ships transatlantic right now, you're really going into another market, which is depressed. So...
Søren: ...it's not a disaster to stay short.
John: Yeah, the pressure on the transatlantic market, the UK continent to the U.S. market has been enormous. We've seen U.S. gasoline demand actually really push up this summer.
John: And, you know, the EIA forecasted as one of the biggest summers for several years. But we've really not seen that reflected in the transatlantic freight market.
Søren: No, no. I think there should have been...there has been a decent activity, actually, and also a decent amount of vessels going transatlantic. We have seen stock growth as well, and I think the problem now is there's a limit to how much Europe can export. And that's the next problem. So, that's the natural cap on that, but as I mentioned before, the cargo in the water has been at fairly normal levels.
John: Yeah, the only times that we've really sort of seen a buoyant movement is when there's been some sort of disruption to U.S. supply as well. Those storms back in the early part of the year that shut down production in the Gulf, and we saw a massive spike in handysize rates and...MR rates, sorry.
John: So, it feels like, you know, it almost requires those disruptions to US supply to get enough product moving to push things up.
Søren: Yeah. But on the other hand, in the tanker space, the disruptions does not help to be that significant to have a pretty significant impact on the rates.
John: Right. And how about to West Africa? We've mentioned before that a lot of the VLCCs are going into there.
John: We've also seen some improvement to the infrastructure there, lowering the turnaround time.
John: Is that also helping to open up the European fleet a bit more?
Søren: It's been...definitely a part of the problem with the MRs that West Africa has not been that supplied from Europe as has been the usual. It's been supplied by big ships coming from the east or mostly minimizing the demand for MRs on these routes. And we have seen in the past business sit down there for a long time, obviously adding to the inefficiency in that segment, and obviously that's not assisting at the moment.
John: Yeah, exactly. And the ships can return to Europe a lot quicker, and you just end up with more and more vessels sitting there and just limiting the volatility in the freight race. I think that's been, from our perspective anyway, that's been one of the biggest trends we've seen is just volatility has been reduced to almost nothing. Would you agree?
Søren: Yeah. It's been very flat, and we haven't really seen any spikes for the past...any significant spikes, in the past 12 months. And I think it's short-term. It's a natural consequence of, you know, all segments and tankers having issues at the moment and cannibalizing on the smaller segments, and we just...we always see in these low markets that the volatility is just disappearing on the physical side.
John: Yeah. And how have you been addressing that as Norden? Have you been sort of focusing more on the period deals, the longer-term deals?
Søren: It's been a bit of a combination. After the big short-lift boom in tanker rates in the spring 2020, we had an idea that there were to be a hangover after the party. We knew that the market would go into troubled water. At the time we were probably caught by surprise how long the hangover has been, but we went into the low freight market here, with I think a record amount of physical cover. So, time chartered a fairly big amount of the fleet out. That has been sort of the longer-term strategy to avoid...at least stop the bleeding. And then on the shorter-term, then we have used Freight Forward as a tool, especially on looking at one, two, three months ahead.
Søren: Yeah, so, on the dry cargo side for example, there's usually quite a lot of cover on the one-year or two-year deals. Do you find that the liquidity is there in the tanker market for those longer deals at the moment?
Søren: Not...it's not...
John: In the forward market, I mean, sorry.
Søren: Yeah, in the forward market it's not been that liquid. It's one of their...there are a couple of issues with the FFAs on tankers, especially in the MR segment, there are only certain routes available. So, for us it means in the Atlantic we use...we trade FFAs on the route from Europe to the U.S. east coast, and then from the U.S. Gulf back to Europe. And as we've seen, especially the U.S. Gulf back to Europe, its probably has not been that busy on the physical market. So, when we can only head from those routes in the Atlantic, there's a certain amount of basis risk on our trade. And on top of that, liquidity has improved in the FFAs, but they're still limited in liquidity. So, we use it's short-term to hedge our physical exposure when we can, but we can only do it on the routes significantly linked to those routes we trade. The same on the handys, we can use the Freight Forwards a little bit on a clean cross-met rate where we also use it as a hedging tool. But the problem is we can't really trade indexes, so talking about taking cover out in time, one year ahead, for example, then the vast majority of the liquidity is in the Atlantic basin, and we can't take the worldwide cover we would like. So, on the longer-term deals we prefer to take the cover on the physical side instead of fixing the vessel out on time charter.
John: Right. And you mentioned you fixed a lot of these ones on time charter at the beginning of 2020, so I guess some of those have been coming back to you now as the deals expire.
Søren: Yeah, they're starting to come back here end of the year and the beginning of next year. We have, I think, in the tanker operator with this...the book dealing with vessels up to two years and on the time charter, I think when we reach June of next year, there's probably one left and otherwise the book is fairly open for next year. I guess talking into the strategy also, which most owners at least see that we are starting to see the recovery now, and I think most people, they start to at least have a brighter view on the future.
John: So, I mean as we discuss sort of the crude is pushing up, and we're seeing the refineries pushing up. So, with the way that the market is at the moment, do you think that you'll look to put those ships out on the longer-term cover again, or will you perhaps keep them on the shorter spot deals?
Søren: At the moment we've looked a little bit the other way, actually, and taking advantage that we can trade the ships in the spot market, and use the low spot market as a tool to increase our exposure going forward. So, we've been basically taking ships in on time charter for, especially 12 plus, 12-month deals with flexibility on the back end. So, we've decreased our TC out activity and focused on increasing the fleet instead lately.
John: Right. I guess that's the great benefit of being an operator, you're very...you can change your fleet very quickly. You must be very flexible.
Søren: Yes. Especially on the time chartered fleet, we are fairly agile and it is always difficult, or more difficult, on tankers to adjust the book, but I think what we developed is a variety of tools both on paper and spot and time charter where we can adjust the book fairly quickly if we want.
John: And have you had to focus particularly on newer ships for that sort of deal? Because we've seen a lot of environmental regulations come in...
John: ...and a lot of customers are wanting more green ships, and I guess a lot of those and the more modern ones.
John: Is that an area you're focusing on?
Søren: We're looking at it. It's developing into a two-tier market where we've seen, for example, eco-ships or scrubber ships demanding a bigger and bigger premium over conventional tankers. And at the moment it is, we have to look at what fits into our program, so it's been a bit of everything. We've taken modern and also non-modern tonners that fits into our trades. So, we are very aware about it and I think in the future, that gap will increase between eco and non-eco. So, I think the awareness will definitely increase. We're already seeing it, as you mentioned now.
John: Yeah, absolutely. Absolutely. It's one of the big areas moving forward for the tanker market, isn't it? Because we sort of, we've got through that IMO 2020 situation where we had to switch from 3.5% sulfur fuel to the .5%. Now we're looking at IMO 2030, and of course, IMO 2050, which is where we're looking to be completely carbon-neutral, and we're having to look at fuels that, to a certain extent, don't even exist yet. I know that there's one that's been explored.
John: Yeah, it's going to be very challenging moving forward, I think.
Søren: Oh, yeah. It will be. So, the next couple of years ahead is probably not the headache at the moment where operators and owners have to find out what they want to do. It's further ahead, really, where the industry has to figure out what's going to happen.
John: Absolutely. Absolutely. So, looking at everything, looking at the sort of cannibalization that we've seen, but the gradual increase in crude volumes. How do you think rates are going to evolve over the next six months? At the moment, a lot of the MRs for example, they're well below operating costs.
John: I know on the transatlantic, for example, it's less than $2,000 or even less than $1,000 a day. How do you see that evolving?
Søren: So, we still have a couple of difficult months in front of us. As I mentioned before, while the crude demand is slowly coming back, then the supply is still lagging behind. So, we really need to see the crude market rectified before we see a significant change on the MRs. That being said, we are seeing the crude market behaving a little bit better and we believe when we are through the next couple of months, then we are in the beginning of the recovery in the MR and handyspace, or the clean space in general. So, we believe next year will be significantly better than this year, and then even better out in 2023. So, we are at the worst and we are hopefully also over the worst, I would say.
John: Yes, exactly. So, hopefully we'll see pushing through this month and rates will get back above operating costs because ship owners operating below operating costs for an extended period of time. It can often lead to things like consolidation in the industry. We haven't seen too much of a sign yet, but I guess that could be something moving forward as well.
Søren: Yeah. Have you seen...obviously the last we saw, we were a part...took some of those ships over [inaudible 00:20:18] so there are consolidations going on, but it is a challenging market to make anything happen right now.
John: Exactly. Yes, no, but as always, the clean market remains a very interesting market to be a part of, I think.
Søren: Yes. I will say, and also if, yeah, looking further ahead also, I guess, some of all those modern refineries coming online in the far east will also...or should have a positive impact, in our space at least, when they're being made further away from the crude production rate.
John: Yeah. A lot more ton miles it'll lead to, certainly both for the crude, and I guess for the clean tankers as well.
Søren: Yeah. Exactly. So, I think we're still waiting to see that really kick through to the MR segment, but that is another positive for the market as ton miles will definitely increase on that account.
John: Fascinating. Excellent. Well, thank you very much for talking to us today. It's been fascinating to talk to you and get your insight into the clean tanker market, and your outlook for the second half of 2021 and beyond. It certainly sounds like we're in the eye of the storm right now, and it looks like moving forward we'll see rates ticking higher again and perhaps less of a cannibalization that's been a trend so true of this year.
Søren: Yes, yes. Certainly.
John: Excellent. So, if you'd like to find out more about the clean tanker freight market, you should check out Argus Freight, which includes news, analysis, and prices from the industry. You can also visit the Weight of Freight content space, where we publish regular blogs, webinars, and podcasts about the freight market. And head to ArgustMedia.com, and the Argus blog to find out more about our extensive coverage of global commodities including gasoline, jet, and of course, crude oil. Thank you very much for joining us today, Soren. It's been a fascinating conversation, and I'll let you continue with the rest of your day.
Søren: Thank you very much, John. Enjoy the rest of your day as well.