After an unprofitable year for crude tankers, the recent rates recovery is warmly welcomed. But whether this seasonal fourth-quarter boost extends into 2019 is far from certain.
Geopolitical wildcards seen testing crude tanker market recovery
GEOPOLITICAL instability clouds any outlook, and the oil price is volatile. As a result, many underlying fundamentals are not supportive: US sanctions on Iranian crude, the China-US trade war, and political instability in Libya and Venezuela amid ebbing world economic confidence can all impact demand for oil and thus influence global energy flows.
After reaching four-year highs in September, oil prices fell ahead of US mid-term elections as indicators pointed to a global economic slowdown and currencies weakened in emerging markets. Should crude prices rise again, demand destruction will be most acutely felt in countries already battered by currency devaluations, including India.
On the other hand, the supply of newbuilding tanker orders is easing, suggesting the glut of vessels that has depressed rates and offset demand growth and tonne-mile gains may not weigh as heavily on the global fleet. Scrapping over 2018 has accelerated. The market is now looking for very large crude carriers to lead the way for the crude sector to leave the depressed conditions of 2018 behind it.
The US resumption of sanctions against Iran kicked in on November 5. Iranian crude and condensate shipments were already contracting well before this date, reaching about 1.8m barrels per day in October, from monthly levels as high as 2.5m bpd earlier in 2018. How much further exports will shrink is not clear, but a figure of 1m bpd-1.4m bpd is likely in coming months, and perhaps even lower if the US administration succeeds in its ‘zero’ approach.
Shipments will now be limited to Iranian-owned National Iranian Tanker Co (NITC) tankers, mostly VLCCs and suezmaxes. Several of these VLCCs have been seen storing condensate off the Iranian and United Arab Emirates coasts in past months, suggesting floating storage numbers will likely rise as sanctions bite. This is positive for VLCCs, removing vessels from the spot market. NITC has had between 20 to 30 of its fleet of 47 tankers in floating storage when European and US sanctions were last imposed from 2013 to 2015.
Middle East Gulf producers and Russia have stepped up to replace lost Iranian barrels. This is likely to render neutral any impact on demand for tankers over the next quarter, given the call on tonne-miles. A drop of 500,000 bpd in Iranian exports equates to about seven fewer VLCCs loading there each month. Iranian sanctions are generally viewed as positive for tankers.
US crude exports continue to reshape global crude flows
However, the most positive factor for crude tankers through early 2019 will be the continued rapid evolution of the US crude export market, which has already lent critical support to VLCCs and suezmaxes in 2018. This development is reshaping global crude flows and providing additional earning opportunities with triangulated trades. Asian refiners have boosted purchases of US crude in the past nine months, and this will continue, although the level of Chinese imports is uncertain.
The pace of monthly exports from the US Gulf has reached as high as 2m bpd and should remain around 1.6m bpd-1.8m bpd over the outlook period. The key to reaching the upper limit of these volumes is the spread between the price of Cushing-based West Texas Intermediate crude and Brent. Capacity constraints on getting the light sweet crude from fields to the US Gulf for export support WTI’s discount to Brent. When the spread has widened to around $10 per barrel or above, exports have surged to 2m bpd as arbitrage opportunities in Europe open, and Asian suppliers buy cheap crude.
With a six-week sailing period, the latter market has boosted tonne-mile demand for the VLCC market. China emerged in the first half of 2018 as the second-biggest buyer of US crude after Canada. This dramatically reversed over October, when imports ceased. No VLCCs laden with US crude called that month, down from the three to four each month seen over 2018’s first half.
Although South Korea, India and other Pacific basin countries have so far filled the gap, any global economic slowdown may curtail this lucrative employment of VLCCs for owners and operators.
That said, Brazil-China crude flows have gained in the final quarter of 2018 and this is expected to continue into early 2019 amid continued China-US trading hostility. These voyages help to offset any drop in tonne-mile demand from falling US Gulf-China volumes.
Chinese seaborne crude imports likely surged to a record in October, averaging just over 9m bpd in the first seven months of 2018, according to Joint Organisation Data Initiative statistics.
Along with India, China is expected to account for 640,000 bpd of the 1.5m bpd of global crude demand growth in 2019, according to the International Energy Agency.
However, bearish economic indicators in both countries’ economies will test the resilience of recent gains in spot rates for the crude tanker fleet. If economic indicators are revised lower in the new year, this will be reflected in smaller gains in volumes of crude shipped by sea, lowering utilisation and tonne-mile growth.
Oil market backwardation rules out floating storage
Aside from Iranian crude or condensate, the oil market offers little employment support for floating storage for early 2019.
Storage of refined products and crude on VLCCs and aframax vessels temporarily sheltered owners from the dramatic rates collapse seen in the bulk carrier and containerships sectors in the post-recessionary environment of 2008-2010. However, oil futures remain backwardated — the future price lower than the spot price — and have been since mid-2017.
Future prices need to be higher than the spot price — a contango structure — to provide any incentive for oil traders to use vessels for floating storage.
There is speculation that later in 2019, VLCCs may be employed for storing high-sulphur fuel oil ahead of the January 1, 2020 implementation of the sulphur cap on marine fuels. Ships will be banned from using or carrying 3.5% sulphur bunkers unless there is a scrubber on board. Demand for HSFO is anticipated to plunge, along with the price, with storage of excess HSFO flagged if the economics support it. Such a development is unlikely in the first three months of 2019 but should not be ruled out.
Wildcards to watch include Libyan and Venezuelan crude exports. Venezuela has been circling the drain for most of 2018. Despite the oft-forecast collapse in exports, its state-run oil company PDVSA has managed to stave off any impending demise — for now. Shipments to markets in the US and Latin America have fallen but cargoes to its economic benefactor China are still sailing, albeit at slightly reduced volumes.
Less than 1m bpd was tracked exported from Venezuela in October, a multi-year low, if not a record. From levels above 1.6m bpd-1.7m bpd in 2016, exports have dropped to average about 1m bpd-1.3m bpd this year.
Although this meant fewer shorter-haul voyages from Venezuela on aframax vessels, an emerging US Gulf-Europe transatlantic route has compensated for this. Refineries in the 28 European Union countries began testing US crude grades towards the end of 2017 and those in the UK, France, Italy and Spain have all begun receiving regular supplies on aframax and suezmax tankers.
Crude exports from the North African country of Libya topped 1m bpd in October, the highest seen in several years, supporting cross-Mediterranean rates.
But this market cannot be taken for granted as the political situation is highly volatile, with fighting factions ready to curb output at key producing fields. The precarious security situation means export volumes could be variable over coming months, providing no guarantee that that soaring rates for aframax tankers in the Mediterranean will be sustained.
West African crude exports provide the second-largest market for suezmax tankers after the Middle East Gulf and prospects there appear stable. However, West Africa has not emerged as the winner in the US-China trade war that quickly displaced nascent US crude flows.
West Africa-China crude flows remain more or less unchanged for the final quarter of 2018 over the prior-year period. Instead, China is importing greater volumes of crude from the Middle East Gulf to meet demand growth, including grades from Iraq, Saudi Arabia and the UAE.