Fitch Ratings: Tanker Market to Witness Marginal Gains

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Global demand acceleration and more oil shipments could mean a pick up next year for the tanker industry, though growth would be difficult due to the effect of tonnage oversupply.

Fitch Ratings said on Monday that new deliveries of oil tankers, and the dismantling of older ones, meant the tanker market, just like the broader oil market, will be over-supplied for the time being. The capacity of new vessels by the end of the year will be about 6 per cent higher than in 2016.

This would keep the freight rates low and shipping company credit metrics under pressure in 2018. “We forecast capacity to rise a further 4 per cent in 2018. This reflects orders placed in 2015 when tanker rates were high, with a large share of orders coming from Greece and China,” Fitch Ratings said.

Vessel scrapping has increased slightly, helped by higher steel prices. But only five very large crude carrier (VLCC) class tankers were scrapped in the first seven months of this year, while 36 new VLCCs were delivered in roughly the same period.

The Organisation of Petroleum Exporting Countries (OPEC) is working to drain the surplus on the five-year average of global crude oil inventories through coordinated production declines. The effort to balance the market is offset, somewhat by record-setting U.S. crude oil exports, backed in part by a shale sector that has been more resilient to lower crude oil prices than initially anticipated.

“We expect rising global oil consumption, higher US exports and gradually moderating oil inventories to drive a moderate increase in tanker demand in 2018. Demand could, therefore, rise by about 4 per cent, potentially matching supply growth,” the agency added.

This should halt the market’s deterioration, but tanker rates are unlikely to receive a significant boost without further vessel scrappage or slower capacity growth, Fitch noted.

The study implies that tanker rates would remain at current low levels throughout 2018, though they should avoid the sharp falls of the last two years. Rates for Suezmax vessels dropped by 39 per cent in the first 10 months of 2017, following a 52 per cent decline in 2016.

Nevertheless, Fitch said that the vessel market was still facing headwinds, with contract rates at or below the current norm. That said, metrics won’t repeat the slump from the last two years, when oil prices were at historic lows.

Those companies placing big bets with long-term contracts will be the ones turning in bigger profits, “while those with few long-term contracts are likely to break even at best,” the agency noted.

Sea News, November 14

Baibhav Mishra
Author: Baibhav Mishra