TANKERS QUARTERLY: Freight may rise on longer voyages

Asia-Pacific tankers are likely to be firm in the third quarter of 2022, driven by changing trade flows leading to longer voyages amid the lingering Russia-Ukraine war and slow growth in the fleet.

While clean tanker freight hit an all-time high in June for some routes and a 26-month high for others, market participants and analysts expect that even dirty tankers will make gains in the current quarter.

This is likely to benefit owners who can use rising earnings to retire costlier debt while it may further push up the delivered cost of cargoes, making oil and its products expensive for end-users. However, the growth in earnings will be stymied by record-high bunker prices.

"Tanker freight is in early stages of a cyclical recovery, which is likely to continue in the third quarter, with strength gradually shifting from clean to dirty," said Oslo-based Ole-Rikard Hammer, senior analyst, oil and tankers, Arctic Securities.

London-based Maritime Strategies International, or MSI, has forecast daily average spot VLCC earnings during Q3 at $4,500, taking into account voyages to China from the US and the Persian Gulf, compared with a daily loss $6,200 in the first quarter. It has forecast that compared with Q1, LR2 earnings on the Persian Gulf-Japan route may more than quadruple to $24,700 in Q3.

Clean tankers will remain very strong due to a smaller orderbook for new ships, the imminent regulations on carbon emissions and the reorganization of the trade flows caused by sanctions on Russia, said Enrico Paglia, a Genoa-based research manager with Banchero Costa, or Bancosta.

Oil demand

Global oil demand is growing and inventories are very low, a classic setup for a trade upswing, Hammer said. This already became evident during the first half of 2022, with volumes approaching pre-pandemic levels, he added.

International Energy Agency, or IEA has forecast that the global oil demand will surpass pre-pandemic levels in 2023 at close to 102 million b/d. Shipping executives across the globe are latching on to such projections, while painting a bright picture for tankers' freight.

VLCCs have been reeling under pressure of a large fleet and brokers estimate the average daily losses so far this year in spot chartering on the Persian Gulf-North Asia routes at just over $5,000.

Late in June, before the freight rose above the key psychological mark of w50, daily losses for VLCCs on these routes were more than $15,000, the estimates showed.

Clean tankers have outperformed their dirty counterparts but now they too are expected to close the gap as refineries ramp up run rates, said Hammer. IEA estimates that expansion in global refining capacity will boost throughputs by 2.3 million b/d this year.

War time energy trade

With the Russia-Ukraine war in its fifth month, there is now greater clarity on changing trading patterns, which has given a boost to longer voyages, or ton mile demand and tankers' freight.

Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by distance traveled in miles. Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same, or conversely, it offsets the increase in supply of tonnage.

In May, crude shipments from the Middle East to Asia dropped by about 8% month on month, MSI's Director, Tim Smith said in a monthly report. OPEC production also fell by about 200,000 b/d from the previous month, he said.

Earlier trade was lagging as OPEC+ cut output and companies cleared an overhang in inventories, said Hammer. Outlook has now improved. Western sanctions on Russia will push up freight for dirty tankers in the medium term, added Paglia.

Volumes are increasing, not least because demand for cheaper Russian crude is high, said Hammer. Moreover, distances are lengthening with Russian barrels shifting to Asia, while more oil is coming elsewhere as a substitute from the US Gulf and the Persian Gulf. According to IEA, Non-OPEC+ is set to lead world supply growth through next year, adding 1.9 million b/d this year and 1.8 million b/d in 2023.

Orderbook

From next year, the tankers' fleet growth is expected to slow considerably to around 1% due to historically low orderbooks, which are currently equivalent to around 6% of the trading fleet and a slight pick up in demolitions, said Bancosta's Paglia.

The tankers' orderbook is at least at a twenty-year low, added Arctic's Hammer. Low scrapping means there is still some fleet growth, but it is slowing and the level is manageable, he said.

According to Bancosta's estimates, during the first five months of the year, the global dirty tankers fleet grew by 1.5% with the VLCC fleet expanding by 1.8%.

During the same period the fleet size of clean tankers increased by 1.5%, but remains almost unchanged for relatively smaller sized ships due to a reduction of the number of handy tanker and LR1s amid scrappings.

In dirty tankers, Iran remains a dark horse and Paglia said a strong boost to freight could come if sanctions on the country are lifted, as that would increase demand and force a significant part of older tonnage to the scrapyards.