Even though I walk through the valley of the shadow of death

Even though I walk through the valley of the shadow of death

I will fear no evil. The market will eventually recover, writes BIMCO’s chief shipping analyst, Peter Sand.

Shipping cycles are sometimes considered to be almost biblical. They come around and they go around regardless of how owners/investors act and which way the world turns. Sorry, if you did not get the memo – it doesn’t work like that.

While we patiently wait for the global oil stocks to come down, let’s focus on the positive drivers that certainly are found in the tanker market today. And rest assured that BIMCO market analysis believes in fundamental market conditions more than ‘biblical’ shipping cycles.

The total fleet growth is the one that matters. Some may focus on a single sub-sector, like VLCCs or MRs. But not even the performance of these ‘benchmark’ ships, can escape the fact forever, that they too are at the mercy of the overall market development.

Within the oil product tanker sector, we saw the fleet of LR2s expanding by a double digit figure during 2015-2017, now at 7.8% y-o-y growth in March 2018. Within the same time span, the MR/handy fleet growth went from 6% down to 1.5%.

The point I want to make is that freight rate movement is closely synchronized regardless of the differences in sub-sector fleet growth. It’s the total fleet size that matters, as they are de facto substitutes for each other in most trades.

The total fleet growth in 2018 and 2019 seems to be manageable for both the crude and product tankers.

Also of vital importance to note is the shift in US exports and ever growing Chinese imports. In 2016, the tonne miles tanker demand generated by US crude oil exports amounted to 18% of the significant tonne miles that US oil products exports generated. In 2017, the importance increased to 70% for the full year. Seaborne US crude oil exports tonne miles demand exceeded that of oil products exports during September to November of that year.

This trend seems to be continuing in 2018, as the growth of US oil product exports has diminished in recent years. Still exported mostly in terms of volumes, but second to crude oil exports when considering the vital sailing distances too. In February 2018, US crude oil exports accounted for 55% of total US tanker tonne miles demand, but only to 35% in volume terms.

The next big question is: (when) will oil become a part of the US trade war with China?

China being the largest importer of US crude oil in 2017, lifted its total oil imports (inclunding pipelines) to 8.4m bpd last year, up from 7.6m bpd in 2016. Q1 2018 shows imports now at 9.1m bpd.

Finally, there’s the IEA and OPEC loudspeakers. While South Korea has silenced the loudspeakers that blast cross-border propaganda (until further notice), someone else is picking up the megaphone.

In its Oil Market Report of April 13, the IEA stated: “OECD stocks in the next month or two will have reached or even fallen below the 5-year average target”, suggesting that OPEC might as well claim it’s “mission accomplished”. Less than a week later, the OPEC and non-OPEC joint technical committee concluded alike. Hardly a surprise, but are they right in stating this?

Please be aware that OECD stocks only account for an estimated one half of the market, making it an incomplete proxy for the whole oil market. Moreover, it’s relevant to mention that if you estimate the global stock building as the difference between global oil supply and global oil demand, you reach a different conclusion. That conclusion points to a stock building that peaked in January 2017. Since then stocks have been drawn upon, but only half the way towards a five-year average estimate.

In the end, the return of an oil price in contango ends most of this dispute. Currently it’s a market in backwardation indicating the rebalancing process isn’t over yet. Nevertheless, the sooner the better for the oil tanker market.

 

Peter Sand will be chairing BIMCO’s Power Panel at Posidonia this morning.

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