DNV GL sees gradual reduction in orders for crude oil tankers, with an expected average level of 75 ships per annum

It is hard to believe, but less than one year ago, oil prices were hovering around USD 110 bbl. Little did we know that within six months prices would plummet to some USD 45 bbl at the lowest point. The increased production of unconventional oil in the US, combined with high OPEC production, resulted in a glut of oil in the international markets, subsequently bringing prices to a level last seen in 2009. Needless to say, for ship owners paying USD 300/t for bunkers instead of USD 700/t, every day feels like a birthday!

While the entire merchant shipping industry benefits from the reduced fuel expenses, crude oil tankers seem to have hit the jackpot! Besides the savings made on bunkers, they have also been blessed with substantial growth in the demand for tonnage. Cheap oil triggered an intensive stockpiling (particularly in Asia), which resulted in an increased number of fixtures for crude oil tankers. As a result, the freight rates have gone up substantially. Average one-year TC rates are at least twice as high as they were a year ago. A strong spot market is keeping oil tankers busy and owners are reluctant to offer their ships for storage. Interestingly enough, it is not the end of the good news for crude oil tankers. Increased cargo volumes coincide with a very tight fleet supply. Due to the low number of contracts placed in 2011
and 2012, very few ships are being delivered nowadays. The tight supply/demand balance is helping owners to push the rates even higher. Although the current orderbook contains 79 Suezmaxes and 89 VLCCs, deliveries in 2015 are limited to only 16 Suezmaxes and 25 VLCCs. With such low fleet growth, the rate is very likely to remain strong throughout the next 12 months.

Despite strong fundamentals supporting the market, there are also several factors which need to be addressed. First of all, the robust growth of shipments was triggered almost entirely by stockpiling. As the storage reaches its limit, the crude oil must be moved and used eventually. Although it is believed that lower prices will cause higher consumption, we are yet to see the magnitude of that effect. Until that happens, it is impossible to tell how much longer the strong demand will continue.

Secondly, as we expect a substantial number of deliveries for 2016 and 2017, strong rates are going to gradually come under pressure. Since there is only limited potential for scrapping (or conversions), the crude oil fleet growth will accelerate, thus increasing the supply of tonnage.

Another interesting development which may finluence crude oil movements is the rapid increase in refinery capacity in the Middle East and India. As more products are generated in that region, it is reasonable to expect this to lead to reduced exports of crude oil. This will be of particular importance to Europe, where the reining capacity is constantly declining. In such a case, we may expect a growing trade in products (carried by LR tankers), subsequently
reducing crude oil exports from the Middle East.

On the other hand, significant changes are taking place in the traditional trade patterns, offering new opportunities for crude oil tankers. Diminishing transatlantic trade, due to lower US imports, has redirected most of the West African crude oil, which now goes to China. As the new trade offers a longer voyage, it benefits the VLCC fleet. Another example is the unstable situation in Libya. Due to the ongoing conflict, crude oil exports out of the country, mostly to Europe, have decreased and need to be compensated by West African crude oil which has similar properties. This increases the tonne-mile demand for Suezmaxes. Although we can call it a shortterm disturbance, it is likely to remain for some time in the future.
As the crisis deepens, it may take several years for the country to restore its previous export capacity.

Last but perhaps not least is the expansion of Chinese refineries, which are coming online as early as in 2015. This will certainly reduce the product tanker trade, but crude oil imports are expected to increase in order to supply the new refineries. There are, of course, many more factors which may be discussed.

We have only discussed those which in our eyes are the most significant nowadays. All the conclusions leave us with somewhat mixed feelings. We definitely believe that the market will remain vibrant in the short term, but at the same time we are aware of possible threats in the longer term. Oil prices remain a key factor when considering the well-being of the oil tanker market. Although we are currently experiencing a significant overproduction of oil, it
may be difficult to keep oil prices low in the long run. It is worth mentioning that the depressed oil price environment has significantly reduced the investment in exploration, production and maintenance. In a few years, this may have severe consequences for the oil industry and as a result may reduce the future production capacity. It may then lead to reduced demand for tankers, particularly if the oil price starts to recover again.

All of this has led us to come up with a contracting forecast which is still very optimistic for the current year. Positive sentiment continues to draw attention to this sector, fuelling the order book with new contracts. Nevertheless, as a result of high deliveries, we anticipate a gradual reduction in orders for crude oil tankers, with an expected average level of 75 ships per annum.
Source: DNV GL Tanker Update No1 2015