Tanker Market 2018: Q2 Performance, Q3 Forecast, an Outlook

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(Image used for representational purposes only)

An abundance of tonnage not seen since Medium Range tankers stacked up outside US Gulf Coast refinery terminals-post Hurricane Harvey in September 2017 is expected to far outpace any potential recovery of inter- and intra-regional trade flows. Owners’ hopes of re-balancing the moribund market will demand cautious marketing and discipline.

Position lists stacked with over 50 MR tankers in the 10-day forward window since the beginning of May are weighing heavily on freight rates, with second-quarter values ranging between 10% and 20% below first-quarter levels.

“Owners are fixing to do negative voyages to position themselves to other equally bad markets,” a shipowner said. “So my take is, owners need to step up and it will balance.”

Yet an upward curve of refinery utilisation on the US Gulf Coast to a2018 high of 97.6% for the week that ended June 22 from a low of 89.1% in the week that ended May 11, according to US Energy Information Administration data, plus an increasing amount of exports and cargoes fixed during the third decade of June are offering positive signs for the coming quarter.

“Week 22 is up almost 60% from week 21 on the number of fixtures,” a shipowner said. Another shipowner’s take on the situation was that an enormous amount ofdemand was needed to fill those ships available on the USGC.

Hence the most recent 12-20% uptick in rates is deemed to be on wobbly legs at best. S&P Global Platts data show the USGC-trans-Atlantic and the USGC-Brazil runs opened at World scale 82.5 and w140 Friday morning.

LACK OF INTER- AND INTRAREGIONAL ARBITRAGES

A marked lack of arbitrage opportunities for ULSD voyages to Europe extending from the first into the second quarter — as strong demand for diesel in both west and east coast of South America markets has been pricing this product out of European markets — reduced trade flows on the backhaul US Gulf Coast-trans-Atlantic route to term volumes.

Shrinking USGC refined product exports to Brazil and Mexico have also helped build the prompt tonnage overhang.

Deadweight tonnage on the USGC to Brazil route halved in May from Aprilto 748,129 dwt from 1,469,679 dwt, according to data from Platts’ cFlow tradeflow software, as a Brazilian trucker strike was heard to have dampened demand for offloading of any type of cargo at terminals.

Rising domestic prices, coupled with increased competition from biofuel alternatives, are understood to have kept pressure on sales and imports of gasoline and ULSD.

Mexican gasoline and diesel imports from the USGC in May fell 6.8% and11% compared with April, respectively, according to Mexico’s energy ministry, and helped swell position lists for vessels on the USGC further.

TIME CHARTER EQUIVALENTS IN NEGATIVE TERRITORY

At w67.5 (USD 10.75/mt), freight on the US Gulf Coast-UK Continent run reached a low June 5 not seen since October 26, 2016, according to Platts data, and soured shipowner sentiment through to June 27, when freight markets began a rebound.

In the face of high IFO 380 CST bunker prices, with the six-port global average, including Houston, New York, Rotterdam, Piraeus, Fujairah and Singapore, indicated by Platts at between $440-$450/mt during the last week in June, time charter equivalent (TCE) levels ranged at between minus USD 4,200-USD 4,500/day, while triangulated TCEs for the front-haul UK Continent/back-haul USGC-UK Continent routes were heard below USD 1,400-USD 1,800/d during that time, levels that did not turn any profit, according to shipowners.

At a lump-sum June freight low of USD 290,000 for the USGC-Caribbean route, a rate not recorded by Platts since last October, and USD 165,000 lump sum for the USGC-East Coast Mexico trip, TCEs for non-Eco mode vessels ranged between zero to minus USD 50/d.

REBALANCING ACT

Naturally, shipowners have started to put up strong resistance at these levels and some have been taking a rebalancing of the market into their own hands by sitting vessels. Hiding, sitting, and hoping to be tapped quietly with a quiet look at a cargo was the name of the game in June, according to shipbrokers.

While some ships perform these voyages better than others, depending on the vessel’s age and fuel economy, not moving them at all is not an option for owners with financing deals.

“If we are not moving we are losing more money,” a second shipowner said.” We need to have some cash flow because of financing.”

While not yet a structural decision, such as laying up a vessel and having it watched by a service provider, a five-day waiting period is hoped toachieve better overall returns, according to a shipping analyst.

“We are not doing negative voyages unless we are positioning to a better market or better voyage,” the first shipowner said.

LR1 Tankers, Handysize Bulkers and Panamax Containers: Q2 Forecast winners

The price of prime aged vessels is expected to rise over the next two years. Putting extended trade disputes aside, most market segments have favourable tailwinds. The contraction of yard capacity is expected to support the replacement value of ships, while short term earnings have either bottomed, or started to recover in most markets. The charts below show the expected performance of a fixed age five-year-old asset. Vessel specific forecasts are available to subscribers.

Tanker asset values look set to climb as the current culling of the fleets older units will help lead to a finer balance between supply and demand. The decision by OPEC and Saudi Arabia to put more barrels into the market should increase the cargo count in the Arabian Gulf. This will lead to a rosier outlook for the second half of the year than many predicted.

LR1s look poised to see the highest gains. The run up in demand for distillate flows ahead of the 2020 bunker switch over should benefit large clean product tankers. LR1s are currently seeing depressed asset values, and the expected value on mean reversion alone should benefit owners.

(References: Platts, Vessels Value)

Sea News Feature, July 3