In International Shipping News 09/11/2016
A funny thing happened after oil exporters reached what seemed like a landmark agreement to cut output in September: they shipped crude with abandon. The number of very large crude carriers (VLCCs) booked to travel from the Middle East to Asia reached the highest in five years in mid-October, according to JBC Energy.
The temporary bump in oil prices—they have since moved sharply into reverse since the Organization of the Petroleum Exporting Countries has failed to agree on actual production cuts—made each barrel sold worth more. But shipowners are still feeling swell. Rates for VLCCs reached around $45,000 to $50,000 a day or about 50% higher than some companies projected for this normally soft time of year.
While that was good news for operators such as Euronav NV, Frontline Ltd and Teekay Tankers Ltd., the industry looks likely to go from relative feast to famine. Demand growth appears far short of the level needed to absorb the highest number of tanker orders in a decade last year.
Consider the numbers: When analysts translate crude demand growth into tanker demand, the figure must be applied to seaborne trade only of about 37 million barrels daily. Deutsche Bank transportation analyst Amit Mehrotra estimated earlier this year that incremental demand would be enough to justify an additional 31 VLCCs in 2016 and about 18 per year from 2017 through 2020. That compares with 72 VLCCs ordered by shipowners last year and an average of 40 in the two years before that.
While orders plunged to just 14 VLCCs so far this year, the damage has been done. It takes 1½ to two years for shipyards to deliver. Furthermore, few ships will hit the 20-year mark soon when they tend to be scrapped.
Deutsche’s demand estimates also don’t take into account a possible drawdown in inventories. The International Energy Agency estimates that commercial and government stockpiles in the developed world are enough to cover about 100 days of petroleum product imports, nine days more than three years ago.
And then there is China’s mushrooming strategic petroleum reserve. J.P. Morgan estimated earlier this year that 15% of China’s imports were flowing to this SPR earlier this year. Stopping or slowing the process would soften tanker rates.
The final refuge of oil tanker bulls is so-called floating storage—a rare occurrence when physical crude becomes too cheap relative to futures expiring in several months. Brief opportunities have opened up in the past when the difference has become high enough that it was worthwhile for traders to lease supertankers to store barrels on the water and simultaneously sell the same barrels at a profit in several months, tying up capacity. This expensive arbitrage is on the cusp of profitability after crude’s recent retreat, but nearly not enough to soak up tanker supply.
The upshot for owners is lean times ahead with a possible turnaround in a couple of years as deliveries shrivel and older ships get scrapped. But their share prices reflect lean times with five crude tankers owners off by an average of 65% in the notoriously boom-and-bust industry in the past year. Tempted bottom-pickers may want to wait for shipping rates to collapse before shopping for potential bargains, though.
Source: Wall Street Journal
