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Wednesday, October 17, 2018

Houston - The Market Session foresees promising demand prospects at present but a possible surplus build-up in future

The main message of the five speakers of the INTERTANKO Market Session at the Houston Tanker Event was that demand prospects currently look rather promising, but that a surplus may still build up due to the large orderbook. The session was chaired by Basil Mavroleon, Charles R. Weber Co., who opened by highlighting challenges the industry is facing including record ordering and the 2010 phase-out situation.


Nancy Yamaguchi from Trans-Energy Research Associates emphasised that a great many of the changes in the oil and tanker market are driven by political changes, such as the removal of MTBE (methyl-tertiary-butyl-ether) imports to the U.S., which amounted to 60 thousand barrels per day (kbd) in 2001 and are now down to zero. MTBE came mainly long-haul from large, gas-rich countries, including in the Middle East, and Europe. She predicted that the use of ethanol could cause a similar change. Ethanol imports are less attractive because of the 2.5% ad valorem tariff and duty and may therefore to a great extent be produced domestically and stimulated by subsidies - U.S. domestic ethanol production surged to 310 kbd in 2006. Ms. Yamaguchi indicated that ethanol use in the U.S. could expand to the extent that it could replace the current imports of gasoline.


On the other hand, Steve Christy from E.A. Gibson believes that the U.S. demand for transportation fuels would continue to increase and be mainly petroleum-based, with ethanol being neither a cost-effective nor an environmentally-friendly solution. Christy focused on the strong refinery expansion that is coming on stream in the Middle East and India and believes this will eventually provide a growing market for LR2 product tankers. Because the infrastructure is not in place, for example in the U.S., it may take some time before the terminals are able to receive such big ships. Economics of scale would, however, stimulate the development of such infrastructure.


Since there is no new refinery development either in the U.S. or in Europe, new long-haul trades from India and the Middle East are likely to develop to satisfy growing demand. It will, however, take some time before the big refinery projects are completed and in the meantime a surplus of LR2  tonnage will build up while at the same time the MR market benefits from more long-haul product trades - until the infrastructure to take larger ships has been developed.


Colin Cridland from Braemar Seascope was also concerned that a surplus of tonnage is building up for the crude oil tanker market, due to high deliveries of newbuildings, particularly in 2009. He believes that some single hull tonnage will continue to trade after 2010.


Tina Gilje from Inge Steensland showed that with the entry into force of MARPOL Annex II, some 40-45 m tonnes of vegetable oils, plus other products, are reserved for the chemical fleet. Major export capacity additions of Annex II products are also coming on-stream as from next year in the Middle East Gulf, Pakistan and West Coast India. The biggest destination for these exports is Asia. Middle East export capacity is scheduled to almost double between 2006 and 2012. Ms. Gilje showed that the projected chemical trade average annual growth rate for 2006-2011 was 5%. However, she also showed that even with a strong increase in both the chemical and clean product trades, fleet growth would still cause the market balance to soften in 2008, with a forecast for 2009-10 of steady or firming.


Dave Saginaw from McQuilling Brokerage Partners said that there was an increasing demand for forecasts, in particular because of the growing number of public tanker companies. But forecasting is an underdeveloped process in this industry due to the multifarious problems caused by the complex logistics system and the lack of availability of good quality data. Forecasting future freight rates in the tanker industry is an activity characterised by imprecise results. McQuilling Brokerage Partners has developed a capacity index showing the available supply and demand situation for this purpose.


Saginaw pointed out that the average size of tankers has declined over the last 25 years with more aframaxes around and relatively fewer VLCCs. He also said that there is considerable slack in the system with tankers spending a significant portion of their lives sailing around empty or otherwise inefficiently deployed.


He said that the phase-out of single hull tankers will have a limited impact during the 2006 – 2009 timeframe and tonnage supply is likely to outpace demand in the coming years. Significant phase-outs are scheduled for 2010 across all major tanker sectors.


Tonnage Supply & Demand Compare Average Annual Growth 2007-2009:













Coated Aframax




He concluded by saying that the year 2010 represents a major market discontinuity when a large number of vessels may be required to exit the trading fleet over a short period of time. This will create tremendous volatility in the short-term in this timeframe and will likely introduce a fundamental shift in this shipping cycle over the longer term.


All the presentations can be viewed on the INTERTANKO web site under Intertanko Presentations.


Contact: Erik Ranheim