Not Logged In, Login,

Tuesday, December 12, 2017

Freight rates weaken – demand side unclear

Freight rates in all tanker market segments have weakened considerably in 2005, despite increasing oil demand. At our AGM market session in Athens in April, the consensus was that the tanker market would depend on the strength of oil demand as the fleet development was more or less given. The owners were therefore advised to watch the world economy, which to a great extent would influence oil demand. 

We see a stronger economic growth than expected in key areas for the tanker market such as the U.S. and China, which should mean increased tanker activity. We observe reduced spot chartering of VLCCs compared to the last two years. According to Clarkson, the peak month in 2003 was August with 195 fixtures, with an average for the year of 123 fixtures; in 2004 it was October with 175 fixtures, with an average for the year of 133 fixtures; in 2005 it has been June with 152 fixtures, with an average for the year so far of 128 fixtures.  

Oil imports to the U.S. have increased from an average of 10.0 mbd Jan-July 2004 to 10.24 mbd for the same period in 2005. Total stocks in the U.S. have grown by some 54m barrels, which means some 0.24 mbd or the same as the increase in imports. U.S. gasoline imports are up by some 7.7% Jan-Aug. compared to the same period in 2004. 

IEA's projection for oil demand in the U.S. is 20.93 mbd in 2004 (up 0.2 mbd) and 21.2 mbd in 2006. 

China is a conundrum, and the International Energy Agency (IEA) asks how oil demand can appear to grow by only 1.4% while the Chinese economy is reported to be growing at a rate of 9.5%. In explaining this disparity IEA says that some analysts have maintained that Chinese economic growth may be somewhat weaker than official government figures suggest. There is also evidence that growth in key energy consuming industrial sectors has slowed to a certain extent. Although these explanations probably have some merit, China's overall economic performance would still appear inconsistent with the weakness in apparent demand. The true reason for the apparent inconsistency between China's rapid economic growth and stagnant oil demand growth is likely to be a combination of several of the factors given below: 

  • There has been some indication of unwillingness to supply domestic markets and deal with local shortages of gasoline.
  • There are some signs that power shortages have been less severe in the first half of 2005, which may have contributed to more limited use of small diesel generators
  • There have been some reports of a product stock draw in the first half of 2005. IEA cautions that if stocks were substantially overbuilt at the end of 2004, then 4Q2005 apparent demand growth could be weaker than expected.
  • There are clear indications that interfuel substitution has been playing a role in the reduction in demand for fuel oil in the first half of the year. Coal and hydro power generation have increased and some fuel oil users have turned to substitutes like 'coal mud' and 'coal tar'.

IEA's projection for oil demand in China is 6.75 mbd in 2004 (up 0.317 mbd) and 7.259 mbd in 2006.

 

India is not a big oil importer, but it is a country with a huge population and with an obvious growth potential. However, average net crude oil imports of 1.1 mbd in the first five months of 2005 were below the average for last year of 1.2 mbd.

Japan is on the other hand one of the biggest crude oil importers with average imports of 4.21 mbd in the first half of 2005 compared to 4.13 mbd in 2004. 

The European figures are lagging behind and are even often revised. European crude oil imports 1Q05 (12.83 mbd) were some 4% below 1Q04, but imports in May increased to 13.29 mbd. Products imports 1Q05 (5.84 mbd) were some 3% above 1Q04. 

We have previously talked a great deal about the supply side of tankers, which is quite predictable for the next couple of years. This year only some 7m dwt (3.8m dwt so far) will be sold for decommissioning, and 29m dwt will be delivered. It is also in this year that the market will experience the full impact of the 2004 deliveries of 26m dwt. 

Sales for decommissioning in 2005 

dwt

Number

Average age

Phase-out rest 2005

Phase-out 2006

Phase-out 2007

Less 20,000

23

31.2

35

45

67

20,000-50,000

19

27.9

83

6

26

50,000 -79,999

11

26.0

27

0

13

80,000 -119,999

19

26.2

5

5

27

120,000-199,999

3

24.3

0

4

3

VLCCs

1

29.0

2

1

4

Total

76

26.4

152

61

140

 The phase-out of small tankers is unclear and probably overstated. 

Contact: Erik Ranheim