Viewpoint: Clean tanker recovery hopes for Europe

Positive signs lie ahead for product tanker owners, as chartering rates ticked up significantly in the fourth quarter of 2018, and bunker prices fell at the same time. Fleet growth slowed compared with last year, and forecasts put oil demand growth slightly higher in 2019.

The incoming International Maritime Organisation (IMO) 2020 regulations will add tonne-mile demand as greater quantities of compliant fuels move ahead of implementation. The combination of these factors should help owners with their bottom line in 2019.

Chartering rates remained relatively low from July to October 2018, but a surge in demand forced rates upwards significantly just before the winter. Demand was high on both sides of the Atlantic, which helped maintain rates for tankers loading in the US or Europe. This kept many Medium Range (MR) tankers trading in the Atlantic Ocean, which effectively limited available tonnage for non-transatlantic business.

At the same time, Handysizes were trading actively in northern and southern Europe. Consequently, charterers had to meet their cargo delivery obligations by either booking larger Long Range (LR) tankers or continuing to work with a limited pool. This was a perfect storm for charterers, who faced some of the highest rates recorded in the past few years.

Product demand also supports higher chartering rates, with the IEA forecasting global oil demand to increase by 1.4mn b/d in 2019, up from an estimated 1.3mn b/d in 2018, a metric that correlates with product tanker demand. While the growth in demand is modest, oil trade movements outpaced oil demand growth, according to BP's Statistical Review of World Energy. The average growth rate of oil consumption from 2010 to 2017 was 1.7pc; oil trade movements, facilitated largely by tankers, grew by an average 2.8pc in the same period. The same pattern should hold true in 2019 with movements growing disproportionally to the demand increase.

IMO 2020 might further shipowners' gains. Brokers and owners expect the new fuel grade requirements will drive up demand for moving compliant fuels on product tankers, and boost rates accordingly. In the OECD, fuel oil stocks already fell to a historic low as refiners are gearing up to provide compliant fuel.

MR owners opted for west Africa-destined cargoes when transatlantic voyages were unfavourable, however charterers decided to opt for larger LRs when MR west Africa rates started climbing in November and December. As a result, MRs and LRs achieved higher earnings. West Africa will continue to be a destination of choice in 2019 when other markets are softening, but shipowners' timing will be key because ballasting back to Europe when transatlantic rates climb could hurt their bottom line.

Fleet growth slowed in 2018, as shipowners did not order as many tankers as previously. According to brokerage Howe Robinson, clean product tanker tonnage grew by 4pc in 2018, a decrease from 2017's growth of 6pc to 7pc. Howe Robinson estimates a net product tanker fleet expansion of 4pc in 2019. These lower growth numbers are positive for shipowners, after two years of oversupply.

MR owners enjoyed a recovery in rates in late 2018. Chartering activity picked up in November, pushing freight costs to some of the highest levels seen in the past few years. The UK continent to US Atlantic coast rate was 28pc higher on average in in the fourth quarter of 2018 compared with a year earlier; the second half of 2018 was 14pc higher year-on-year.

Freight rates for transatlantic routes in both directions remained high until mid-December. Charterers made a lot of cargoes available starting in November and at the same time, many tankers were already booked to sail from Europe to west Africa, effectively limiting available tonnage. Rates out of the US Atlantic coast and US Gulf increased even more than in Europe — the US Gulf to UK continent $/t cost even surpassed that for the UK continent to US Atlantic coast voyage in November. These developments drew tankers to the US Atlantic coast; others were on their way to west Africa and this reduced the number available to charterers.

The UK continent to US Atlantic coast rate for MRs was at $14.87/t on 2 July 2018; the rate maintained an average of $17.11/t from then until 2 November, before a rally to $27.24/t on 12 December. The market might cool slightly in the short term because of a more favourable tonnage list for charterers, but the fundamentals are there for average freight costs to stay above 2018 levels.

MR freight rates for the UK continent to west Africa route reached a three-year high on 11 December, when Argus' assessment closed at $32.45/t. The average on the route was 12pc higher in the second half of 2018 than in 2017; costs were 27pc higher year-on-year in the fourth quarter. Demand on the route will remain high for as long as Nigeria is stockpiling gasoline ahead of February elections.

Howe Robinson estimates the order book at around 12pc of the fleet, slightly higher than 11pc in January 2018. The brokerage also estimated around 100 tankers will be delivered this year, potentially increasing the fleet by around 7pc. With 29 of these to hit the water in the first quarter, this might put a slightly lower ceiling on MR rates in early 2019.

Handysize rates on cross-Mediterranean routes averaged just below $7/t from June to September in 2018 and 2017. However, the category benefited from high demand in all regions during the fourth quarter and rates rallied in November. The cross-Mediterranean rate reached $13.23/t on 14 December, the highest since March 2017. Freight on the route averaged $9.98/t in the fourth quarter, 19pc higher year-on-year. In the Baltic, where diesel movements made up most of the fixtures, freight to the UK continent averaged $13.88/t in the fourth quarter, 20pc higher year-on-year.

Brokers estimate the Handysize fleet order book to remain steady at around 4pc this year.

LR rates made a recovery from November onwards. The UK continent to west Africa voyage for an LR1 reached as much as $24/t, the highest since Argus started assessing the route in 2016. LR rates increased in parallel to MRs, so charterers decided it was worthwhile to load larger 60,000- 90,000t cargoes and pay less in $/t terms than to load two or three MRs. Some shipowners decided to load dirty cargoes early in the third quarter, to take advantage of more attractive Aframax rates. These tankers were then out of the market for clean cargoes and limited supply.

In the Mediterranean and the Black Sea, charterers moved a number of naphtha cargoes to Japan, but had to pay a higher price as many LRs were east of Suez in the fourth quarter. The lump sum rate for an LR2 loading in the Mediterranean and sailing to Japan reached $2.750mn, the highest point since Argus began assessing the route in May 2016.

For LR2s loading in the Mideast and sailing to the UK continent, rates reached at $2.85mn — the highest since September 2015. Mideast Gulf countries are poised to expand their refining capacities significantly in 2019, which should help maintain rates well above the lows seen in 2016 and 2017.

According to Howe Robinson estimates, the LR orderbook represents 11pc of the existing fleet, with 15 LR1 and 31 LR2 deliveries scheduled for 2019.