What is driving the tanker market?

VLCC rates have increased by some USD 30,000 per day since the Prudhoe Bay shut-down announcement, even though the reduction in supply turned out to be only half of what was first announced.


It does not appear to be the increase in oil demand that is driving the tanker market - the demand from Europe, Japan and Korea is flat and the U.S. oil demand increase only marginal. Only oil demand in China (+0.43 mbd) and the Middle East (+0.33 mbd) is increasing significantly; the other increases are of 0.1 mbd or less. The total increase, according to the International Energy Agency (IEA), will be 1.19 mbd or 1.4% in 2006, the projection for 2007 is 1.59 mbd or 1.9%. OPEC’s projection is +1.3 mbd for 2006, with China and the Middle East as the leading growth regions. OPEC expects demand for OPEC oil in 2007 to drop by 0.8 mbd compared to 2006, as non-OPEC oil is expected to grow by 1.8 mbd to 53 mbd. Non-OPEC growth is expected in the Former Soviet Union (FSU), Africa and North America.


It is difficult to see how the development in oil supply could lead to longer distances for tankers, rather the opposite in fact.


On the supply side the fleet will increase by more than 6% this year, and more than 6% every year for the few next years. The fleet increase is limited this year by few deliveries of VLCCs. Even if there have been no sales of VLCCs for demolition this year, several are said to have been sold for conversion. Even more important is that many appear to have been used for temporary storage and some discharging delays of VLCCS have also been reported in the market. The competition for double hull tankers may also have contributed to higher rates. There are still some 160 single hull VLCCs and a total of some 96 m dwt of single hull tankers (including some 13 m dwt double bottom (DB)/double side (DS) tankers).


As from 2009 new large refineries in the Middle East and India will mean increased exports of products from these areas, which probably will be at the expense of VLCC demand. There has been a tremendous increase in product tankers over the last years. The much discussed pipeline from Russia to China is also expected to be completed at this time, but this is a highly political issue involving some uncertainty. The first crude oil to be pumped via the Kazakhstan-China pipeline has finally reached its destination at the Dushanzi refinery, at least two months behind schedule. The 200,000 b/d pipeline has the distinction of being the first ever to pump crude direct to China, but there are pricing issues that need to be resolved before a smoother flow can be guaranteed.


Contact: Erik Ranheim