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Monday, December 11, 2017

Why is the market so good?

OPEC says that demand for its crude in 2011 was an average of 30.1 mbd, representing a gain of 0.4 mbd over the 2010 level. In 2012, demand for OPEC crude is projected to average 30.0 mbd, roughly in line with the previous report and about 0.1 mbd lower than last year.

Considering the low market in 2011, any lowering of the OPEC production will be bad for the tanker market, particularly when considering that Libya is increasing production, which may mean less long haul from the Middle East. Libyan oil production was down to 0.047 mbd in 3Q11, but increased to 0.562 mbd in 4Q11 and increased further to 1.2 mbd in February 2012 – but still low compared to 1.6 mbd in 2010.

Non-OPEC oil supply is expected to increase by 0.6 mbd in 2012, and North America (0.33 mbd) is expected to have the largest growth, followed by Latin America (0.26 mbd) and the Former Soviet Union (0.12 mbd). Declines of 0.33 mbd in total are expected in the North Sea, Middle East and Africa.

There is no easy way to see why the VLCC market is as strong as it is at the moment, other than that the availability of VLCCs in the Middle East for loading the next 30 days seems to be moderate and the uncertainty and tension surrounding the Iranian situation may mean both speculation and build up of stocks for security reasons.

It is not easy to see why the VLCC market is as strong as it is at the moment, other than that the availability of VLCCs in the Middle East for loading over the next 30 days is very low, and the uncertainty and tension around the Iranian situation may mean both buying oil for speculation and building up stocks for security reasons.

Braemar Seascope says in its weekly reports that, given the large volume of oil covered for western destinations over the past ten days, owners are keen to make the most out of this increase and to push sentiment further. With Saudi Arabia increasing its output as US stocks pile up, the spike in rates continues. The Chinese have run the gauntlet by entering the market for the last 10 days of April, whilst the Thais got caught short by waiting until the last minute to fix an early cargo off 8 April, adding "fuel to the fire" and increasing owners’ confidence. The availability of tonnage in the AG - although adequate to cover the supply of cargoes expected for the month of April - is the smallest list the London-based broker has seen all year.

There have been relatively few period contracts so far in 2012 and the average rates and the average length of contracts has declined.

Period contracts of 6 months and above

Most of the contracts this year have been for MRs which goes some way to explaining the decline in average rates. The average TC rates for the MR have slightly increased since 2011, but the MR rates will in general naturally be lower than for the bigger sizes.

The graph below shows that average TC rates peaked for crude tankers in 2007.

The table above shows that the age of tankers that have been taken on period contracts has been very low and has showed a downward trend for more than 10 years.

 

The declining period rates are an indication that, even if the spot market has been quite strong, the overall fundamentals are still weak.

Contact: Erik Ranheim