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Thursday, November 15, 2018

Tanker market overview as low spot rates, record high bunker prices and a weak dollar squeeze the tanker owners

The problems in the financial markets have resulted in a downward adjustment both in economic growth and oil demand. So far there have only been minor adjustments, and there is still great uncertainty with regard to how the U.S. and the world will be affected by the turmoil in the financial markets.


The oil tanker market is in need of good news as rates are below break-even in all segments. The temperature in the VLCC market can, to some extent, be measured by the number of spot fixtures: 

 The graph shows a healthy increase of 11% in the number of spot fixtures in 2007 over 2006. Looking at the Clarkson fixture figures since 2003, it has been October and January that have been the most active fixture months with an average of 141.2 and 140.6 respectively, whereas December and February have been the months with the lowest average number of fixtures with 105.0 and 106.6 respectively. On average there have been a lower number of fixtures per month in the second half of the year (124) than in the first half (126.5).


But the relatively high number of spot fixtures is clearly not driving spot rates to new highs today. So what else is happening?


  Another important factor is the oil stock situation. According to yesterday's International Energy Agency (IEA) report, OECD stocks rose in July, but preliminary data for August for the U.S., Japan and the European Union (EU) show a net stock draw. U.S. crude stocks have fallen by some 31 m barrels since the end of June. However, we now appear to be in a backwardation situation where lower prices are expected in the future – and in these circumstances stock draws are likely to be minimal until the market changes. In fact slightly lower stocks could lead to some potential for stock building.


A third important factor affecting the tanker market is oil production in the Middle East.

 Middle East oil production during the first three quarters of the year was some 0.6 mbd below the average for 2006. It is expected to increase by 0.5 mbd in 2007 in order to manage inventories and maintain prices.


Turning to the supply side, this looks more positive now as more tankers are being converted to offshore installations and in particular to ore carriers. Some 10 VLCCs have so far been taken out of the market this year, and up to 20 are rumoured to be disappearing by the end of the year. This will no doubt improve the market balance. Whether there is capacity to undertake all these conversions by the end of the year remains to be seen. In addition to the projects for this year, a significant number are expected to be converted in 2008 and 2009.


The overall tanker fleet graph below assumes that 20 VLCCs are taken out of the market in 2007, 15 in 2008 and 10 in 2009. It assumes a 3.8% trade increase and that 7.55 m dwt of single hull tankers continue to trade beyond 2010, of which 2.5 m dwt will be taken out each year in 2011, 2012 and 2013. It further assumes a balanced market end 2006. A small surplus is then building up this year, which will increase to 12 m dwt in 2008 and 42 m dwt in 2009 and decline to 23 m dwt in 2010. The biggest surplus is building up in the aframax sector (6.2 m dwt in 2008 and 13.7 m dwt in 2009).


 In addition to the supply and demand factors, we recorded yesterday an all time high bunker price in Fujairah for HFO IFO380 of USD 401 per tonne and USD 700 per tonne for MDO. This means that not only is one of the main cost factors at a record high, but the weak dollar is simultaneously depressing the income side. 

 VLCC freight rates 13 September were the lowest since August 2003, but it is worth noting that by December 2003 rates had risen to about USD 90,000 per day.

Contact: Erik Ranheim