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Saturday, December 16, 2017

Increasing oil price and declining freight rates

 

The oil price is increasing and the freight rates are sliding. The oil market today is currently driven by inventory and refinery management. Refiners are still making money, even with crude at USD 80/bbl and are now scrambling to lock in falling margins by buying crude against selling products.

 

New tankers are continuously being delivered into the marketplace. Scrapping is low, partly because there is a great deal of conversion activity as a consequence of high ship prices. Some 4-7 VLCCs are projected to be converted to dry bulk carriers in 2007, and 8 in 2008. There are several suezmaxes scheduled for conversion to heavy lift, and many aframaxes have been converted, or are to be converted, to double hull. It appears, however, to be extremely difficult to obtain accurate data on the status of conversions. Taking account of both conversions and scrapping, the removals from the market so far this year are well under 5m dwt. Deliveries for the whole of 2007 will be some 29m dwt.

 

The activity in the VLCC spot market has been record high this year, according to Clarksons, with average monthly fixtures exceeding the 2004 peak point of the last 6.5 years (see table below) to hit 134 a month in 1H07. However vessel arrivals, which stayed at a two-year low in 2004 just as monthly fixtures were peaking, have this year risen above last year’s high point to a level twice that of 2004. In fact the availability of VLCC tonnage arriving in the Arabian Gulf during the next 30 days is 82 vessels, 42 double hull ships and 40 single hulls, according to Braemar Seascope figures (compared to 86 (38 and 48) last week).

 

VLCC spot chartering – monthly average number of fixtures

 

2001

2002

2003

2004

2005

2006

1H07

AG - West

25

24

31

34

25

23

29

AG - East

54

45

57

64

60

61

69

AG - RS

3

4

2

3

3

3

1

Others

35

31

32

32

29

31

35

Total

117

104

123

133

117

118

134

Arrival

52

52

33

34

48

61

68

Source Clarkson:

 

U.S. crude oil imports so far in 2007 have increased by half a per cent to the same level as in 2006. Product imports have declined 6% compared to the same period in 2006. U.S. crude oil stocks are record high, 2.4% above last year's level and 9.8% above the average for the last three years.

 

OECD crude and product stocks in June were the highest this decade for that month, up 14m barrels from May (at 2.66 billion barrels), according to preliminary data. Yet pressure is building for stocks to drop, less as a function of high demand and low supply than as a result of the crude market turning into backwardation (the price of a commodity for future delivery is lower than the spot price) for the first time since November 2004 - which is not good news for the tanker market in the near term.

 

Japanese crude oil imports are down 5% compared to 2006. European crude oil imports were also down by 3% during the first four months of the year. This year’s activity is therefore very much dependent on increased Chinese and other Asian crude oil imports.

 

The extra supply from outside OPEC in 2007 will come from the Former Soviet Union (FSU) (+0.54 mbd) and also some from biofuels from the U.S. and Brazil (+0.15 mbd). The increased supply from FSU will more than compensate for the -0.27 mbd decline in European supply. The supply from the Middle East is set to increase, which will benefit the tanker market through increased tonne-miles.

 

Contact: Erik Ranheim