Crude oil tankers have a vital role to play within the energy value chain. Their main role is to transport crude oil from production point to refinery, although they are also sometimes used for storing crude oil post production. Crude tankers can also be used for carrying oil products such as fuel oil. Any clean products that come out of the refinery are carried on ‘clean’ or ‘product’ tankers, which are smaller in size due to the smaller parcel sizes in which these products are traded.
The price for contracting a tanker newbuilding is influenced by a number of factors such as the underlying price of energy, steel, labour costs and available construction finance. Over the last ten years the cost of a new VLCC has ranged from around USD 80 million to USD 160 million. The economic lifespan of an oil tanker has historically been 25 years, although more recently this has dropped closer to 20 years.
Price of Oil – impact on tankers
‘The greater the demand for it, the more demand for its transportation.’ Crude is no different and the sharp reduction in the price of oil the market experienced from the fourth quarter of 2014 prompted a boost in demand in both the U.S. and Europe where oil demand is highly price sensitive. Generally speaking the lower the oil price the stronger demand for it. However the relationship is not linear. As the market saw in the first quarter of 2016, a very low oil price can be demand disruptive.
Key Market Drivers – Demand for Oil
The demand for oil is an obvious driver of crude tanker demand; the more oil that is needed around the world, the bigger the demand for moving this oil from production to refinery. Global demand for oil has generally been rising year-on-year with the average growth rate from 1990 being 1.1 million barrels per annum. Since 2015 this growth rate has been above trend and is forecast to remain so until 2022.
In an interview to Steelguru, Essar Shipping CEO Ranjit Singh said that because of oversupply of tonnage and rise in crude oil prices, the tanker market has been on a fall. The imbalance in the demand – supply equation wherein there has been a consistent rise in delivery now of the VLCC’s ordered in 2014-15. In 2015 VLCCs were chartered at USD 50,000/day; they slipped to USD 38,000/day in 2016 and further nosedived to somewhere in the higher 20s in 2017. This year (2018) unfortunately is bad with VLCCs tumbling to USD 4,000 – USD 5,000/day. “It would be keen to see how the global crude oil prices fare. Improvement in imbalance of supply-demand by scrapping of older tonnage may lead to improvement in freight rates,” Singh added.
Key Market Drivers – Supply of Oil
Oil supply dynamics have undergone a transformation in the past decade, away from being very Middle East focused to having a more diverse supply base, in particular with the development of U.S. shale oil. This quick-to-production process of shale oil (less than six months) has made global oil production far more responsive to short-term changes in demand. Oil supply is dynamic with for instance OPEC (the national oil producers cartel) and Russia voluntarily cutting their crude production and removing cargoes from the traditional trade routes emanating in the Middle East as from the first quarter of 2017.
Key Market Drivers – Vessel Supply
Perhaps the key driver of tanker markets is vessel supply. This is the ultimate driver of market fluctuation; when the market is in short supply of ships, the cost of chartering a ship – the freight – goes up but of course down if there are too many ships available.
Time Charter Equivalent (TCE) Rates – 4Q17
Suezmax vessels TCE comparison
- Teekay Tankers (TNK) earned a TCE of USD 16,644 per day for its Suezmax fleet in 4Q17—down from USD 23,495 per day in 4Q16.
- Frontline (FRO) earned a TCE of USD 19,600 per day for its Suezmax fleet in 4Q17—down from USD 23,500 per day in 4Q16.
- Nordic American Tankers’ (NAT) TCE for 4Q17 was USD 13,800 per day compared to USD 21,600 per day in 4Q16.
VLCC vessels TCE comparison
- Navios Maritime Midstream Partners (NAP) earned a TCE of USD 40,391 in 4Q17 compared to USD 40,719 in 4Q16.
- Frontline’s TCE for its VLCC (very large crude carrier) fleet was USD 19,400 per day in 4Q17—down from USD 32,900 per day in 4Q16.
- In 4Q17, Euronav (EURN) earned a TCE of USD 25,889 per day for its spot vessels and USD 35,399 per day for its time charter vessels compared to USD 33,161 per day and USD 43,833 per day for its spot and time charter vessels, respectively, in 4Q16.
Against a backdrop of depressed market conditions (with VLCC earnings averaging USD 6,392/day in Q1 so far), recycling has picked up further into 2018. Up until 23rd March, 7.3m dwt of oil tankers (including 16 VLCCs) had been scrapped, already the highest quarterly level for 17 years. As a result, recycling has outpaced the 6.9m dwt of deliveries, and has led to a 0.6% decline in the crude tanker fleet since the start of 2018.
It remains to be seen whether this trend will continue to such an extent in the rest of the year, with the tanker fleet currently projected to grow by around 2% in full year 2018.
With tanker deliveries projected to ease by around 20% in 2018 to 28.5m dwt, and potential for scrapping to remain firm in the short-term alongside favourable scrap prices and weak market conditions, it seems likely that 2018 as a whole will see a greater degree of balance in tanker fleet dynamics than has been seen in the past few years.
(References: Euronav, SteelGuru, Clarkson, Market Realist)
Sea News Feature, April 4