Crude demand crash, floating storage create tanker market volatility
Following nearly 10 years of relative price stability, shipping rates for crude oil tankers have fluctuated widely since mid-2018. The US Energy Information Administration (EIA) estimates that an average of 100.8 million b/d of liquid fuels were consumed globally in 2019. About 42% of global crude oil was transported by waterborne vessels.
Although some—typically larger—oil companies own and operate their own fleet of tankers, most crude oil is transported by specialized shipping companies. Rates charged by shipping companies can vary considerably depending on both macro-level factors, such as the supply of available vessels and the demand for crude, and micro-level factors, such as a vessel’s hull configuration, age, route, size, and the share of its capacity that a delivery will use.
The price for the benchmark routes shown in Fig. 1 averaged between $0.98/bbl and $2.04/bbl between 2010 and 2017. The cost to charter a very large crude carrier (VLCC)—which represented 47% of crude oil total tanker tonnage in 2019—for a voyage from the Arab Gulf (AG) to Japan averaged $1.61/bbl during this period.
Over the past 2 years, however, crude oil shipping rates have been volatile. Prices for the AG to Japan VLCC route rose to a 9-month high of $1.35/bbl on Aug. 22, 2018; reached a 32-month high of $2.35/bbl on Dec. 4, 2018; and reached at least a 20-year high of $8.89/bbl on Oct. 14, 2019. Prices have come down from the October 2019 high, but remain relatively elevated. January 2020 VLCC prices for the same route averaged $3.39/bbl, an average not seen since July 2008, when Brent and West Texas Intermediate (WTI) prices reached their all-time nominal daily highs of $143.95/bbl and $145.31/bbl, respectively.
Shipping rates increased in October-November 2018 following the re-imposition of sanctions on Iran by the US government. Although sanctions reduced Iranian crude exports—and, by extension, demand for crude oil tankers—they also limited the availability of tankers owned by the National Iranian Tanker Co., one of the world’s largest crude oil tanker fleets, at the same time demand for shipment along alternate routes was mounting.
Geopolitical events also prompted the September 2019 increase in shipping rates. Following Sept. 14 attacks on Saudi Aramco sites at Abqaiq and Khurais, crude oil prices rose to an intraday high of $71.57/bbl. Although the attacks temporarily reduced Saudi production—and, by extension, the demand for ships to carry Saudi crude—shipping rates rose in the immediate aftermath. One week after the attack, VLCC rates from the AG to the UK and Northern Europe had risen 28% from the day before the attacks.
The rise in rates was likely the product of multiple offsetting factors, including increased exports from other producers, the perceived intensification of risk of future disruptions, increased maritime insurance rates, and the release of limited volumes of Saudi crude oil inventories to meet pre-existing export commitments. The decision by several shipowners, including Saudi Arabian firm Bahri and Brazillian firm Petróleo Brasileiro (Petrobras) to suspend tanker voyages through the Strait of Hormuz, thereby reducing the supply of available tankers, also diminished supply and increased rates.
Sept. 25, 2019, the US Department of the Treasury implemented sanctions on two subsidiaries of Chinese COSCO Shipping Lines Co. Ltd., placing the companies on the Office of Foreign Assets Control’s list of specially designated nationals, and effectively taking 40-50 VLCCs and 80 other oil tankers off the market. Shipping market participants were also unsure if additional sanctions would be extended to other COSCO subsidiaries, or to other shippers who had potentially violated US sanctions. Consequently, many charterers avoided not only ships directly affected by sanctions, but those that could be sanctioned in the immediate future.
When coupled with preexisting sanctions on ships transporting sanctioned crude oil from Iran and Venezuela, this last round of sanctions and the initial uncertainty it imposed reduced availability of crude oil tankers. Braemar ACM shipbroking concluded that around 20% of VLCCs were “relatively restricted” from transporting crude oil. The sanctions on COSCO were partially lifted Jan. 31, 2020, reinforcing the broader fall in tanker rates that began earlier in the month and accelerated through the first quarter as fears regarding the spread of coronavirus COVID-19 slowed the global economy.
COVID-19 has also impacted the clean product tankers market. Daily product miles for clean tankers reached an all-time high Dec. 31, 2019 (Fig. 2) but fell as coronavirus concerns mounted and have remained near 12-month lows since. Daily clean tanker cargo miles fell even more dramatically between the US and South Korea.1
IMO 2020
The disruption caused by these geopolitical events coincided with a fleet-wide switch in ship fueling practices. On Jan. 1, 2020, new regulations from the International Maritime Organization (IMO 2020) came into effect that limited sulfur content in marine fuels used by ocean-going vessels to 0.5 wt %. Although the full impact of IMO 2020 regulations will not be known for some time, early reports suggest the standard has had two primary impacts on tanker rates, according to EIA.
First, many shipowners have switched away from high sulfur fuel oil (HSFO) to fuels with lower sulfur content such as low sulfur marine gasoil (LSMGO) and low sulfur fuel oil (LSFO). Although differences in energy content and performance characteristics complicate direct comparison, both LSMGO and LSFO are more expensive than HSFO (Fig. 3). As of January 2020, LSMGO and LSFO were sold at an average premium to HSFO of $309/tonne and $310/tonne, respectively, in Singapore’s bunker markets. An increase in operating costs generally results in increased charter rates.
Second, some shipowners instead chose to retrofit their vessels with new scrubbers that allow continued burning of the same fuels while complying with IMO 2020 regulations. These retrofits take time, however, and Pareto Shipbrokers AS estimates IMO-induced retrofits might temporarily remove ships equivalent to 2% of the crude oil tanker fleet’s total capacity.
Underlying demand destruction
Analysts expect 2020 global oil demand to contract by an average of 347,000 b/d with no return to year-on-year growth until the third quarter. In its March 2020 monthly oil market report the International Energy Agency (IEA) revised down its forecast of oil demand after the agency warned in February that the coronavirus could limit annual oil consumption growth to its lowest rate since 2011. Rystad Energy predicted a 2.8-million b/d full-year 2020 demand contraction (see accompanying table).
IEA forecast a full-year 2020 reduction in demand of 90,000 b/d, the first year-on-year decrease since 2009, with demand and supply roughly balanced by yearend (Fig. 4). The agency’s low- demand scenario forecast a 730,000-b/d drop.
Demand destruction has been particularly acute in China. Travel restrictions have reduced road travel by 87%, rail travel by 83%, and air travel by 77% since Lunar New Year as compared with 2019. Refiners have cut runs and accelerated seasonal maintenance accordingly (Fig. 5).2
Floating storage
WTI crude oil futures plunged Mar. 18 to around $20/bbl for the first time since 2002. Brent crude oil futures dropped to a 16-year low below $25/bbl. Saudi Arabia and Russia are preparing to increase production in the wake of the Organization of Petroleum Exporting Countries and partners (OPEC+) having failed to reach an output agreement at its Mar. 6 meeting, and a slowdown in global travel and business activity due to coronavirus is suppressing demand.
“The oil demand collapse from the spreading coronavirus looks increasingly sharp,” Goldman Sachs said, forecasting Brent crude prices to fall to $20/bbl in the second quarter, a level not seen since early 2002 (OGJ Online, Mar. 18, 2020).
As inventories have grown, so has demand for floating storage. Poten & Partners reported several deals being negotiated for short-term (6-12 month) charters.3 The competing forces of tanker demand destruction for transportation and demand increases for storage—the former caused by slack demand for crude and the latter by resulting slack prices—increased shipping price volatility as March progressed.
When Saudi Arabia’s state shipping company, Bahri, entered the spot tanker market by booking 25 VLCC to augment its fleet of 41, prices spiked. VLCC rates for the AG-Far East route moved from $30,000/day to $210,000/day in little more than a week. Ten of the 25 tankers were bound for the US Gulf, with another 10 set for the Red Sea entry point to the Sumed pipeline for transfer to the Mediterranean. None were fixed to Asia-Pacific destinations.4
References
- Economakis, A., “Coronavirus effects on the Clean Tanker Market,” VesselsValue, Mar. 3, 2020.
- Poten & Partners, “Where Does It All Go?,” Poten Tanker Opinion, Feb. 28, 2020.
- Poten & Partners, “Saudi Arabia Sparks Oil Price War – Implications For The Tanker Market,” Poten News Brief, Mar. 9, 2020.
- Poten & Partners, “March Madness,” Poten Tanker Opinion, Mar. 12, 2020.