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Sunday, December 17, 2017

POINTS OF VIEW - Changing trends, new market drivers

The tanker business has been accustomed to a certain regular ebb and flow of events through the year, with positive and negative effects coming from a predictably slow second quarter oil market, from regular refinery maintenance, from the US summer driving season, from the seasonal destocking and restocking processes, from OPEC production changes.

But now some of the traditional ‘regulars’ are not quite so regular any more. To take one example, the recent announcement of a two-tier Opec production cutback, which a year or so ago would have affected oil prices and tanker freight rates, was shrugged off by the oil market, and by the tanker market, with barely a murmur. In addition, there are new balls in the air which are different from the traditional ones and which tanker owners are still getting used to juggling.

The spotlight is off Opec as a producer and Europe as a consumer for a start. Instead it’s on Russia as a producer and China as a consumer. FSU oil exports are up to 7m bbls/day from just below 4m four years ago and are forecast to hit 7.8m by the end of this year. Over the same period, the traditional Opec oil supplies have held steady-ish at around 27.5-27.9m bbls/day. This has not been great for tanker tonne-miles as many of these FSU barrels are backing out Middle East barrels, and in addition they are tending to go short-haul Europe rather then on the longer hauls to the US – 80% of this ‘new’ crude oil has been going to Europe with a chunk of the rest going East and comparatively little (say 5%) to the US.

Looking forward, Russia’s Ministry of Natural Resources is forecasting that by 2020, it will be exporting over 6m bbls/day of crude oil to the Asia Pacific region alone – ten times today’s figure. Behind this is the plan to develop new production in Eastern Siberia (including Sakhalin) pushing out some 1.5m bbls/day. This is a fabulous new resource, but once again it’s not great news for tanker tonne-miles. Even less good news is talk of pipelines running east from Russia’s new oil developments to China and Japan.

Chinese consumption is the other big change and influence, with its economy expanding fast but its domestic crude production flat, ensuring that crude oil imports hit a new high in January of 10m tonnes, equivalent to 2m bbls/day. That is 25% higher than in January 2003. Spot tanker activity stood at 850 fixtures last year for a total of 89m tonnes. Compare that with 640 fixtures in 2001 totalling 59m tonnes – it’s nearly 33% growth in fixtures and 50% growth in cargo volume.

Other changes are more subtle but still significant. For instance, Thailand is all set to compete with Singapore as the key energy trading hub of South East Asia. China’s Sinochem has received a ‘qualified trader certificate’ from Thailand which allows it to trade and tranship oil products in the new duty free zone in Sriracha. Sinochem is also negotiating to take over from foreign creditors a 37.5% stake in Thailand’s state oil company PTT, boosting even further the presence in Thailand of booming China.

And even the traditional patterns in the US are not quite the same. The spring maintenance programme of US refineries involves a cutback by about 6% compared to the ‘normal’ 2.6%, according to IEA (International Energy Agency) figures. New York broker and analyst Poten & Partners adds that on top of that, US refinery throughput has been falling since spring 2003 and is now down to 14.7m bbls/day compared to the spring 2003 peak of nearly 16m bbls/day. If all this fall-off were Middle East crude, then that would mean a drop of more than 10% in VLCC demand, says Poten. And yet VLCC rates over the period show no clear correlation to US refinery throughput, even after allowing for a lag between load and arrival dates, says the broker.

Still looking at the shorter term, US crude inventories have fallen to some 250m barrels, a three year low. These will have to be replenished at some stage, says Poten, but with the forward price for crude lower than the current price, restocking is not high on the agenda.

Poten’s conclusion? Refinery maintenance and little restocking mean market weakness in the short term. But once refinery throughput starts going back towards 15.5m bbls/day and refineries are producing gasoline for the summer driving season, rates will firm.

Now there’s a reassuringly familiar ring to that!