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Tuesday, December 12, 2017

Tanker market session at Singapore

Odd Anker Hassel, Director, CERA , opened the market session in his capacity as moderator by saying that the Oil Market March 2006:  is a "Tug-of-War” of opposing market concerns with on the one hand a perceived future supply risk and on the other real fundamental weaknesses.

There have been disruptions to oil supply  in Nigeria, Venezuela, Iraq as well as the U.S.  At the same time the U.S. Crude Oil Inventories (excluding the Strategic Petroleum Reserve) have been well above the historical range since 1999.  There is a strong rise in long-term oil price expectations and the key driving forces to watch, he said,  were economic growth, China, India, Russia, OPEC and in particular Saudi Arabia, Iraq and Iran.
Click here to view the presentation and graphs.

Paul Horsnell, Head of Commodities Research, Barclays Capital, began his presentation by showing that the West Texas Intermediate (WTI) oil price forward curve with seven years to expire had moved gradually upwards from some USD 22 per barrel three years ago to currently above USD 60 per barrel.  He said that there had been a great deal of misguided policy makers in the energy sector and that people had not paid enough heed to the future supply situation of oil.  There is a need for an adjustment in the oil market. The decline in oil production in key non-OPEC producers such as the U.S. and the U.K. is leaving a gap, non-OPEC growth outside the Former Soviet Union (FSU) producing the worst oil output growth for decades.  The call on OPEC oil is still increasing and OPEC needs to increase oil production quickly.
Click here to view the presentation and graphs.

Jason Feer, Vice President, Argus Media, presented an outline of petroleum demand, import and infrastructure in China.  He said that the refining and industry infrastructure had not been built to operate as an integrated system as many parts of the system are isolated and/or connected to markets through inadequate infrastructure.  The current flows (north-to-south and west-to-east) are overwhelming but the infrastructure does not accommodate growth in demand.  For example there are no product pipelines linking the main refinery areas in the north with growing consumption areas in the south. The coastal regions are becoming flooded with products and LPG, but infrastructure does not support shipments to growth areas in the interior.  He also said that future plans do not appear to be addressing the problems as the refining system configuration will not change fundamentally.  Demand for sweet crude, in particularly West African, will remain strong.  Market reforms could dramatically alter the LPG import scenario.  The Chinese Government does not want product imports.

He showed that Chinese product imports and exports had been rather steady at around 0.8 and 0.2 mbd respectively.  Chinese heavy fuel oil imports had been increasing until mid 2004, but then levelled out at about 0.5 mbd.

Crude oil imports had on the one hand increased steadily from some 1.0 mbd at the beginning of 2001 to about 3.0 mbd.  China takes about half its crude from the Middle East, 30% from Africa, 11% from the FSU, 8% from Asia Pacific and 35% from Latin America.

China is considering refining projects of some 6.1 mbd in various parts of the country. The basic structure of the refining sector remains unchanged.  In 5 to 8 years from now there will be large refining additions in the north east.  The biggest change will come in the south that will gain one mbd.  However, dependence on sweet, light crude will remain unchanged.  The ratio of cracking and coking capacity will drop fractionally.  There will be no move to heavier grades.  The proportion of distillate hydrotreating capacity will increase (12% of CDU capacity to 19%).  The increase is significant but should not change the crude import profile significantly. China will take part of its increasing oil imports via pipelines from Kazhakstan and Russia.
Click here to view the presentation and graphs.

Erik Andersen, Director Economic Research, R.S. Platou, talked about the crude oil tanker market.  He said that the aframaxes had been the winner in the tanker market with an average return on equity since 1990 of 27% compared to 24% for the suexmaxes and 16% each for the VLCCs and the MR product tankers.  The return in 2005 was as high as 85% for the aframaxes, 80% for the suezmaxes, 63% for the VLCCs and 69% for the MR product tankers. (The assumptions for these calculations are included in the linked graphs).

Erik Andersen questioned how much the oil supply side would grow. With oil supply growth of 1.5-2% there could be tanker demand growth of 2-4%, which would be less than the fleet growth over the next three years.

Looking at four quarters’ moving average since 1992, tanker ordering peaked every three years, which meant that the next peak would be in the 3rd quarter 2007.  The product tanker fleet will increase by a higher rate (4.4% 2005-2008) than the crude tanker fleet (10.2% 2005-2008).

The drop in tanker freight rates from 2004 to 2005 was a consequence of a 7% fleet growth and a 3% increase in tonnage demand. Capacity constraints in oil production and refining had led to an expected tonnage demand growth of 2–4%, resulting in a downturn in freight rates in 2006-07.  In the next few years there seems to be two important trends:
1) A continued shift in oil trade from crude to products.
2) A significant lower fleet growth for VLCCs than for the rest of the tanker fleet.

The current order book covers 86% of the current single hull fleet.  Single hull tankers will likely be permitted to trade in some areas after 2010 if the market needs these tankers!  Based on the current order book there is a tonnage deficit in January 2011 of double hull tankers of:

  • 28 mill dwt, if demand grows by 2% pa
  • 64 mill dwt if demand grows by 4% pa

The current order book contains 11 mill dwt for 2009-10 delivery. In the 2% growth case 20 mill dwt per year will be needed in 2009-10. In the 4% growth case 38 mill dwt per year will be needed in 2009-10.
Click here to view the presentation and graphs.

Louisa Follis, SSY Consultancy and Research said that there had been softer tanker market conditions for 2005 compared with 2004 due to:

  • slower economic expansion
  • slower oil demand growth
  • refinery limitations
  • fleet growth
  • some resistance from the product sector
  • new trading patterns

The major part of the increase in oil demand in 2006 is expected to come from China and the U.S.

The additional refinery capacity is projected to come in the Middle East and Asia, with only a marginal increase in the U.S. and no increase in Europe until 2010.  Ms Follis presented three scenarios with regard to the development in U.S. refinery capacity.  The low case – which included further refinery damage and decommissioning but sustained oil demand - would result in a reduction in crude imports of 0.74 mbd, or a reduction in VLCC demand of 22 units over this period (based on 6 voyages per VLCC p.a.)  This would mean a greater demand for product tankers or additional product imports of 4.3 mbd. The increase in product tanker demand would then be some 400 medium range product tankers (MRs) (based on average 14 voyages per MR p.a.).  The other scenarios can be viewed in the linked presentation.  The MR orderbook is large with some 4 m dwt delivers each year 2006-2008.  Marginal phase-out is expected.

Positive factors for clean tanker markets are:

  • Clean products trade to be supported by tight refining capacity;
  • U.S. to be the key driver in product markets = more transatlantic shipments;
  • Development of longer-haul trades as new product export refining hubs emerge, e.g. India;

but...

  • The fleet continues to expand very rapidly (especially for 2008/9 delivery) which will keep downside pressure on rates.

Click here to view the presentation and graphs.

Contact: Erik Ranheim