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Saturday, September 21, 2019

Maritime Logistics Professional

August 30, 2019

McQuilling Mid-Year Tanker Market Outlook

File Image: AdobeStock / © Carabay

File Image: AdobeStock / © Carabay

McQuilling Services Announces the Release of the 2019 Mid-Year Tanker Market Outlook Update.

The Mid-Year Tanker Market Outlook Update provides an outlook on the global tanker market in the context of global economic growth and oil fundamentals influencing tanker demand and vessel supply.  The outlook includes a view on future asset values, time charter rates, market freight rates and TCE revenues for 24 major tanker trades and four triangulated routes across eight vessel segments for the second half of 2019 through the remaining four years of the forecast period 2019-2023.  

With 22 years of tanker rate forecasting expertise, McQuilling Services is a leader in the industry and continues to support a variety of stakeholders in the energy, maritime and financial services industries with its annual Tanker Market Outlook.
   
Methodology
The McQuilling Services rate forecast is based on the evaluation of historical and projected tonnage supply and demand fundamentals in the tanker market within the current and projected global economic environment, including oil supply and demand expectations.  The forecasting process begins with the development of quantitative models, which are used to measure the correlation between historical freight rates and tanker supply and demand.  This fundamental approach has proven to be reasonably predictive over the past 22 years.   However, the forecasting process evolves past the modeling stage when the quantitative results are balanced with experiential knowledge and reasonable market assessments.  In 2019 year-to-date, our forecasts from January are tracking within 8% of actual market levels.  

2019 Mid-Year Tanker Market Outlook Update Key findings
For 2019, we project total tanker demand will increase 1.1%, down from 1.6% growth observed last year. Over the 2019-2023 outlook period, ton-mile demand for DPP and CPP is expected to grow at 1.0% and 1.8% per annum, respectively, with the Aframax and LR1 segments outperforming on an individual basis.

Crude and residuals transport is -expected to total just under 10.8 trillion ton-miles in 2019, the highest recorded ton-mile demand. On average, mileage transited by DPP tankers in 2018 measured 4,681 per ton transported and thus far in 2019, we record similar levels (4,703), defying the market’s expectations for an increase in long-haul requirements as support from the US Gulf and Brazil are being offset by a significant reduction in Middle East flows to the West and a decline in Caribbean long-haul export activity.

The VLCC sector accounts for the majority of this demand at 65% of the total demand for dirty tanker tonnage using 2019 year-to-date data. Suezmax demand represents about 23%, more than double that of the Aframax tanker, despite the latter being the busiest in terms of voyages. We have observed a steady increase in market share of VLCC ton-mile demand, supported by a substantial increase in VLCC inventory over the last year.

Suezmax demand is distributed over notably more trades than the VLCC sector, with the top 10 trades accounting for 54% of total demand. Following a modest 1.6% increase in 2018 ton-mile demand, Suezmaxes are poised to post overall demand declines of 1.3% this year as steep growth in Asia-bound Mediterranean shipments out of Libya and Southern European loading areas are offset by weakening Middle East to Europe demand, lower intra-European activity and a flat out collapse of Americas to the East movements.

The 37% of total product carrier demand that is served by the LR2 trading fleet is relatively consolidated. Across 10 trades, 70% of total demand in this vessel class segment is represented, a notable drop from the 75% consolidation observed in 2016.  LR2 demand is projected to increase in 2019 by 5.5%, despite a relatively strong increase in volumes. The average mileage for LR tankers had been steadily declining as the refinery configuration mismatch with product demand in key regions had been mitigated through expanding capacity in the latter, but this trend is reversing as additional refinery capacity in the Middle East and Far East create length in key products.

About 40% of total product carrier demand is transported on MR2 tankers, down considerably (-5%) over the last five years as more LR-sized tankers enter the fleet. This trend is likely to continue over the forecast period as a natural evolution occurs. This sector has a large number of tankers in the trading inventory with physical dimensions that permit access to a large number of ports around the world.

There have been 140 tanker orders placed through July, slightly below the 145 contracts executed in the same period last year. The bulk of these orders have stemmed from the VLCC and MR2 classes as 28 and 56 firm orders have been placed, respectively.  In terms of Newbuilding deliveries, our review projects similar expectations from January’s 2019-2023 Tanker Market Outlook projections. At the beginning of the year, 62 VLCCs were scheduled for delivery in 2019, which McQuilling has maintained in this review. Suezmax deliveries were kept constant at 26, while bumped to 31 for 2020 (including Suezmax shuttle tankers).  Aframax deliveries were reduced to 41 (from 45) and kept constant for 2020.  Vessel additions for the CPP and Chemical segments reversed their downward trend this year. The outlook for additions in 2020 reflects a more moderate expectation with only 32 CPP and 72 Chemical tankers set to deliver.

Looking forward - Fundamentals
Global oil demand is expected to grow 0.9% in 2019 to over 99.87 million b/d with gains projected in the middle-light end of the barrel. The longer-term outlook calls for on average 0.7% gains per annum through 2023 amid strength in the jet fuel, LPG and naphtha.  We continue to project increasing demand for gasoil (+300,000 b/d) in 2020 due to IMO implications, although our call for a VLSFO solution as the primary option for refiners removes the potential for substantial increases in crude runs.

Refining capacity additions are projected to be concentrated in East of Suez markets between 2019-2021.  The Far East and Southeast Asian markets will add 1.4 million b/d and 570,000 b/d, respectively during that timeframe before slowing down considerably.  An increase in West to East flows is projected, although higher concentration of Middle East exports in the Asian markets is likely with reduced flows to the West amid rising Atlantic Basin crude oil supply.  Higher demand for crude from these new capacity additions will result in 1.5 million b/d of growth through 2021.  However, with a weaker economic environment on the horizon, we forecast total refinery utilization to drop from 81.4% in 2018 to 79.7% by 2021.

Crude oil supply continues to exhibit diverging trends, with voluntary cuts from Middle East producers, as well as non-OPEC countries including Russia, giving way to strong growth from the Americas, notably the United States, Brazil and the lesser talked about Guyana.  A stronger European production story in Northern Europe is also forecast due to technological advancements, enabling higher extraction rates in the North Sea.

Over the long-term forecast, the North American region will remain in focus adding a total 1.6 million b/d through 2023.  We anticipate total US production to average 13.26 million b/d in 2020, an even 1.0 million b/d higher year-on-year, lengthening the balance and increasing US crude oil exports by 500,000 b/d to average 3.4 million b/d next year.  The recent decline in oil rig counts should be noted as a potential harbinger to the production forecast.

Following 1.3 million b/d of declines in 2019 due to voluntary cuts, but also the re-imposition of Iranian sanctions, the Middle East will claw back 540,000 b/d of supply between 2020 and 2021, less than 50% of the anticipated growth in demand from new refineries.  This will reduce crude length to 18.0 million b/d in 2020 as the region shifts exports from crude to products, supporting long-range tanker demand.

We find it extremely unlikely that core OPEC producers, including Saudi Arabia, Kuwait and the UAE to fully remove production cuts due to the expected weakness in global oil demand in 2020 and their objective to stabilize prices, which may otherwise come under significant pressure should they abandon production quotas.  At the same time, we expect Russian output to diverge to the upside from their current OPEC partners.

Demand for crude tankers in the present environment is being and will be influenced by a collection of factors including a shift in the OPEC/non-OPEC compliance accord, IMO 2020 regulations, decelerating economic activity, Iranian sanctions, higher North American output and exports, supply disruptions in Venezuela, expanding demand from Asian refiners in the context of volatile crude pricing differentials and a stable European crude demand environment. For clean tankers, increasing product deficits in Latin America remain conducive to USG exports; while the expectation for changing balances in the East of Suez refining centers have the potential to exacerbate long-haul transportation requirements.

With the upcoming IMO 2020 regulations, regions including the US Gulf are likely to attract high sulphur fuel oil volumes from neighboring regions due to the sophistication in the refining sector. Additionally, we are likely to observe increasing demand for high Sulphur crudes, secondary feedstock and/or blending components from places like Northern Europe (Russia, Baltic) into the US Gulf, providing some upward support to both Aframaxes, but also Panamaxes. Furthermore, the build-up of lower sulphur fuel oil inventories and the trading of such thereafter are likely to increase demand for ex US Gulf fuel oil shipments, both short-haul, but perhaps even longer-haul to the Asian Continent.

The continued supply-side cuts from OPEC along with a projected 1.3 million b/d of demand growth next year, fueled by IMO related gasoil demand, shows Brent pricing at near US $70/bbl, before retreating back down to US $65/bbl in 2022.  A spread of US $220/metric ton between VLSFO and HSFO is projected in year 2020 on this basis.

Our view on bunker supply for IMO 2020 is predicated on the notion that VLSFO will be longer-term solution from the refinery complex, at the expense of MGO, which could see some higher demand in the early parts of the adoption period due to compatibility concerns for blended fuel oil solutions. For 2020, we project VLSFO to price at US $531/mt in Rotterdam as compared to US $309/mt for HSFO, allowing for some economic benefit to a scrubber solution. The increase in scrubber-equipped ships, which are projected to number near 5,000 by the end of 1H 2020, will deflect demand back to HSFO. Refinery efficiency in optimizing VLSFO solutions will cause the narrowing of the differential to US $85/mt over HSFO by 2022, impacting negatively owners’ decision to retrofit existing tonnage with scrubbers.

Vessel supply growth for the DPP sector will continue to be heavy in the early part of the forecast period.  Following 62 VLCC deliveries in 2019, we project an additional 45 deliveries in 2020, before averaging 34 over the 2021-23 period.  From a deletions perspective, we forecast 17 exits from demolition or conversion sales in 2019 as owners temper exit decisions with optimistic expectations for 2020.  Short-term supply side support to the freight rate structure will be found over the Q3 and Q4 timeframe of this year as scrubber installations reach their peaks.  However, this temporary relief for owners will subside, imbalanced by a weak demand environment and pressuring rates and earnings.

Basis our view that earnings for non-ECO, non-scrubber VLCCs will average below US $20,000/day in 2020, an anticipated increase in deletions to 36 is expected to help re-balance the fleet during this year.  The pace of deletions is projected to stay firm in 2021 and 2022 with 34 and 35, respectively, decreasing net fleet growth down from 3.8% next year to just 1.0% in 2021 (average inventory basis).  

Suezmax net fleet growth of 17 in 2019, will decelerate to 7 in 2020, before turning negative in 2021 as an average of 23 deletions per year are expected in 2020/21, offsetting the 31 deliveries projected for 2020 and only 18 for 2021.  Aframax net fleet growth is projected to decline by 0.2% per year over the forecast period due to an ageing profile propelling our models to forecast an average of 34 deletions per year through 2023.

On the clean side, LR2 average inventory growth will decelerate from 4.5% in 2019 to 2.7% in 2020, although a 4.2% increase is highlighted from 2022 to 2023.  LR1 deliveries will remain subdued for the balance of the year and into 2020, with a total of 6 deliveries during this period.  Ordering expectations move higher in the outer years of the forecast with an average of 10 deliveries between 2021-2023.  Nevertheless, this tanker class is projected to exhibit only 0.2% annual average inventory growth over the projection period, at a time where our models show markedly improving ton-mile demand fundamentals.

Projections
On the basis of our tanker fundamentals and bunker pricing forecasts, we predict that spot market earnings for standard consumption VLCC tankers will average US $19,593/day in 2020, although the TD3C round-trip voyage will register only US $16,200/day as the higher cost of compliant bunkers outweighs our expected increase in the TD3C WS rate (2019 basis) from WS 53 in 2019 to WS 56 in 2020 as the return of tonnage supply from short term outages (scrubber installations) creates significant pressure on freight rates in 2020 amid stable, but unexciting ton-mile demand forecasts.  

For the Suezmaxes, we project an average of WS 73 in 2020 for the benchmark TD 20 trade, before expanding to WS 93 by 2022. For a non-ECO Suezmax, our projections for spot market earnings over these years is US $10,800/day and US $27,300/day, respectively.  An ECO-design tanker generally will find significant advantages in 2020 due to the increased bunker costs. An ECO-tanker is projected to average US $17,300/day and US $33,000/day on the TD20 round-trip trade over this same period.  

Aframax earnings in the Mediterranean market are projected to average US $11,700/day in 2020, slightly more than the benchmark TD8 voyage. The USG/UKC Aframax trade exhibits a slightly weaker earnings profile on a round-trip basis at US $9,400/day due to the pricing of potential back-haul voyages. By 2022, we estimate global Aframax earnings on a trade weighted basis to average US $26,200/day for a non-ECO design and US $29,900/day for an ECO-consumption vessel.

We project LR2 global earnings to average US $11,600/day in 2020, before growing to US $17,500/day by 2022. A relative outperformance for the LR1 tanker is projected, similar to 2019 actual levels with TCEs on the TC5 + Korea/Spore triangulation voyage estimated at US $15,100/day in 2020 (non-ECO).
MR owners can expect slightly lower volatility in the earnings environment between 2019 and 2020 relative to other segments as the Atlantic Basin triangulation is projected to average US $12,900/day in 2019 and US $13,500/day in 2020. Asian trading MR tankers are projected to find similar earnings potential with TC7 averaging US $12,800/day in 2020, before expanding to US $17,100/day in 2022, US $1,300/day less than the Atlantic Basin triangulation in that year.

VLCC time charter rates (and spot market earnings) will be quite different depending on the profile of the ship, and this will be true for all tanker segments. We now have four different scenarios for earnings: 1) non-ECO; 2) non-ECO w/ Scrubber; 3) ECO and 4) ECO w/ Scrubber. Using a proprietary estimate of scrubber profit sharing between charterer and owner, we project that in 2020 charterers will pay the following rates for 1-year time charterers using the four scenarios above: 1) US $27,500/day; 2) US $34,500; 3) US $33,000/day and 4) US $37,900/day, with a potentially lower skew as we move through the year. Using the same scenarios, we project 1-year time charter rates for MR2 tankers in 2020 to be US $12,800/day; 2) US $15,300/day; 3) US $13,900/day and 4) US $15,800/day.

Secondhand asset prices are expected to exhibit volatility over the next few years. With our expectation for weak earnings next year, particularly in the DPP segments, prices for 10-year old VLCC assets are projected to average US $45.5 million, approximately US $20.0 million below the price of a 5-YR old VLCC asset during the same period. Prices for newbuildings are expected to inch higher to US $95.5 million in 2020 before trending above US $100 million by 2022. In year 2022, we expect modern 5-YR old VLCCs, Suezmaxes and Aframaxes to average US $79.3, US $54.8 and US $42.1 million, significant price increases from current levels.

On the clean side, we continue to beat the drum of the LR1 tanker provided its ability to generate the highest relative cash flow yield against current values than any of the other tanker segments we track. Despite the volatility in earnings next year, we project the price of a 5-YR old LR1 will average US $33.0 million in 2020, US $5.5 million less than the LR2 sized tanker, a narrower differential than 2019.  MR2 newbuilding contracts (IMO II/III) are expected to average US $38.6 million in 2020, about US $8.0 million more than our call for a 5-YR old MR2 tankers. By 2022, we anticipate the price of the 5-YR old asset will reach US $34.0 million, or US $10.9 million more than the 10-YR old MR2 during this period.

Purchasing
McQuilling Services 2019 Mid-Year Tanker Market Outlook Update can be purchased online at www.mcquilling.com/reports or by calling 516-227-5774.