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Sunday, December 17, 2017

Year 2007 begins with a lower oil price and lower freight rates

The year 2007 starts with lower freight rates and a different sentiment to that apparent in 2006, both in the oil and tanker market. The 4th quarter 2006 was expected to place global oil demand back on the road to firm growth, but warmer-than-normal winter weather and declining stocks have caused both the oil price and freight rates to fall. Oil consumption in the OECD area actually fell in 2006, indicating that there has been a clear reaction to the high oil price.

 

    - The latest International Energy Agency (IEA) projection forecasts an increase in oil demand in 2007 of 1.43 mbd, or 1.7%, and an increase in non-OPEC production of 1.7 mbd.

    - OPEC believes that the increase in oil demand will be 1.3 mbd (up 0.4 mbd or 1.57%) and an increase in non-OPEC production of 1.8 mbd.

    - The U.S. Energy Information Administration (EIA) expects global oil demand to rise by 1.5 million barrels per day in 2007, an increase of 0.7 million barrels per day above the 2006 growth.

    - Most of the expected increased growth reflects demand recovery in the United States. China accounts for about one-third of the projected growth in world oil demand, the Middle East 16%.

 

Increased supply is expected to come from the Former Soviet Union (0.4 mbd – a large part from the Baku-Tiblisi pipeline), Africa (0.5 mbd), and Canada (0.2 mbd). Tonne-mile demand has historically correlated strongly with Middle East oil production. There is a potential for increased Chinese long haul imports from West Africa and Venezuela, but the benefit could be reduced if these are back haul cargoes in VLCCs returning from the U.S.

 

Poten & Partners have analysed the spot market and the figures show that spot chartering actually declined for suezmaxes, aframaxes and handymaxes. VLCC spot chartering increased by 1.5% or 27 fixtures. However, this must been seen in relation to stronger tonnage control by the charterers with an increasing number of oil company owned and time-chartered tankers.

 

 

Segment

No. fixt. 2005

No. fixt. 2006

Increase spot fixt.

Fleet end 2005

Fleet end 2006

Incr. fleet

Period contr. 2005*

Period contr. 2006*

Incr. period

VLCC

1,797

1,824

1.5%

137.9

142.6

3.4%

16

33

106%

Suezmax

2,159

2,036

-5.7%

49.0

52.7

7.6%

28

18

-36%

Aframax

4,717

4,411

-6.5%

67.7

71.8

6.1%

45

27

-40%

Panamax

912

986

8.1%

18.9

21.5

13.8%

9

13

44%

Handymax

367

354

-3.5%

70.5

76.0

7.8%

59

75

27%

Small

478

521

9.0%

Total

10,430

10,132

-2.9%

306.6

323.4

5.5%

157

166

6%

Specialized

 

 

 

37.4

41.1

9.9%

*Above 6 ms

 

 

Tanker fleet increase coming at the same time as spot contract decline indicates that there have been other driving forces that have kept the freight rates relatively buoyant. The stronger tanker market in the summer may be partly explained by stock building of oil in the second and third quarters of the year and the use of a number of VLCCs for temporary storage.

 

In the product market, spot chartering has declined while the fleet has increased rather strongly, as has period contracting.  But despite that, average earnings seem to have declined only moderately. Tight refinery capacity and new product specifications are likely creating a great deal of arbitrage trading. Looking further forward, as we have mentioned before, new refinery capacity constructed for export in India and in the Middle East, in particular as from 2009, will probably create new opportunities for product tankers. China is also expanding refinery capacity but probably not enough to keep up with increasing gasoline demand - which will mean imports of gasoline.

 

The fleet will increase even more over 2007 in most segments: VLCCs by 6%, suezmaxes +6%, aframaxes + 5%, panamaxes +13% and handymax +6%. This points to a total fleet increase of some 6%.

 

This means that although the market balance will deteriorate, other factors could still keep things relatively tight.

 

Contact: Erik Ranheim