A historically bad crude oil tanker

News ID: 80125

Date: 17 July 2018 - 09:59

Crude oil tanker earnings have since records began, never been this bad. Earnings for Very Large Crude Carriers (VLCCs) in the fir half of 2018 were as low at USD 6,001 per day on average, with a Suezmax tanker earning USD 10,908 per day and an Aframax making USD 9,614 per day.

Having enjoyed a very strong 2015 that saw the highest freight rates for crude oil tankers in seven years, 2016 was a step down, but still profit making. As the crude oil tanker fleet kept growing faster than demand in 2017, loses returned to the industry, after three profitable years.

BIMCO’s chief shipping analyst Peter Sand comments: “2018 has been absolutely horrible for the crude oil tankers with freight rates and the fleet utilisation rate falling to a record low level.

The total crude oil tanker fleet hasn’t grown at all in 2018. In fact, the VLCC and Aframax fleets specifically haven’t been growing over the past 12 months. The freight market is severally impacted by very weak demand growth.

Overall, the freight market is oversupplied. The key to higher earnings lies within a very low fleet growth and a return to normalised demand level. The sooner the better – but patience is required.”

A long-winding year

When can we expect crude oil tanker freight rates to deliver profits to owners and operators again? And when will overcapacity be significantly reduced? Most likely we must wait until the second half of 2019 before an improved market balance will yet again deliver profits to the industry.

What could trigger a faster recovery?

Since the beginning of 2018, massive demolition activity of excess capacity in the crude oil tanker sector has resulted in an unchanged fleet size. This is a critical element for a recovery to develop. 13 million DWT was demolished in the first half of 2018. Moreover, a different oil market balance may also cause a return to an oil price contango (contango is a situation where the future price of a commodity is higher than the spot price). An oil price contango is likely to indicate an increased demand for tankers for floating storage.

Taking floating storage into the calculations provides an understanding into the volatility over recent years and particularly the improvement in freight rates seen in 2015.

Asian demand is increasingly dominating the market

The general trend over the past ten years has been one of oil demand and oil imports growing in China and India; and oil imports contracting for the most part in North America. Crude oil tanker shipping has benefitted from longer sailing distances to China, but naturally needs Chinese import volumes to continue to grow even if North American imports are not likely to reduce much further.

The supply side will command the future

110 VLCC is what is left in the order book, and that is the figure that matters. The order book also holds 50 Suezmax and 124 Aframax tankers, but that doesn’t really matter in the bigger picture. The VLCCs are scheduled for delivered within the next 33 months. Naturally, owners are in intense talks with shipyards about possible postponements of delivery dates as the market is bad right now.

“It seems safe to say that the supply side holds the key to an improved freight market – and the change of the utilisation rate provides the direction of the market.

Keeping crude oil tanker demolition activity high while holding back on contracting new ships is required to tame the fleet growth, today and tomorrow.

Demand side growth may ease the way towards healthier freight rates, but its support in the coming years seems uncertain and cannot be relied heavily upon”, adds Peter Sand.

As BIMCO has said before, 2018 is set to become another loss-making year for the crude oil tanker industry. Looking ahead, the year when the industry will return to profitable freight rate levels depends on the supply side growing (adjusted for the use of floating storage) at a much lower level than the demand side. Small improvements to the fundamental balance will not be enough to turn around the market.