Crude tanker market to see low freight rates into 2022 with large fleet set to linger

Low freight rates are set to continue to weigh on the crude tanker market into 2022, analysts believe, with shipowners unlikely to scrap vessels due to a young fleet, high costs to scrap and buy new ships and optimism that oil demand will continue to recover.

Platts VLCC freight rate assessments for the Arab Gulf to China and US Gulf Coast to China have seen their lowest levels in 2021 since 2018, with levels currently at the lowest they've been since earlier this year.

S&P Global Platts freight rates for Dirty Arab Gulf-China 270,000 mt have averaged $6.00/mt in 2021 year to date and dirty USGC-China 270,000 mt assessments have averaged $15.69/mt.

This compares to average assessments over the equivalent period in 2020 of $17.24/mt and $33.42/mt, respectively, and 2019 averages of $9.24/mt and $21.27/mt, respectively.

"China's high onshore stock levels and oil prices have led to VLCC freight rates remaining at rock bottom rates," Andrew Scorer, freight analytics lead for shipping at S&P Global Platts Analytics said. "Shipowners need to persevere until Q4, 2021 when there may be some respite from OPEX levels if China enters the market to replenish stocks."

Bearish pressure from the supply side could last longer. The current dirty tanker fleet stands at just over 2,200 and is set to grow until 2024, data from Platts Analytics showed.

Most of these are larger vessels – VLCCs, Suezmaxes and Aframaxes. They typically have a working life of 20 years and their average age at present does not support a decision to scrap. The average age of VLCCs is currently 10.1 years, with Suezmaxes at 10.4 years and Aframaxes at 12.4 years. Only Panamaxes – which number 84 – show a tendency to near the end of their working life at 14.5 years, the data showed.

Platts Analytics' base case scenario is for crude tanker fleet growth to peak in 2024 at 480 million DWT, before scrapping takes center stage as the International Maritime Organization's 2030 climate deadline looms.

The IMO is targeting a 40% drop in CO2 intensity in the global fleet by 2030 compared with 2008 levels, and then a 50% drop in greenhouse gas emissions from the fleet by 2050. In many cases this would require new vessels if shipowners and charterers are to meet these targets.

In the period prior to 2024, that is before the IMO 2030 countdown begins in earnest, vessels will be well within their working life and in the short-term, the high price of scrapping may serve as an additional deterrent.

Busy shipyards

VLCC newbuild prices rose 16% between December 2020 and July 2021 to $100 million,while Suezmax newbuild prices in the same period rose by 20% to $67 million, analysts at maritime consultancy Drewry said in a research note.

The impetus for this is not coming from crude tankers but from other shipping sectors, such as dry bulk and containers, which have seen strong freight rates and a shortage of tonnage in the right place at the right time.

"We believe the uptrend in newbuild prices despite weak vessel earnings has been fueled by the increased bargaining power of shipyards that have emerged as price setters, with yards flushed with excess ordering," the Drewry analysts said.

Since Q4 2020, the higher number of orders from sectors other than tankers has taken up space in shipyards and lead times have now increased, even for smaller vessels, according to Platts Analytics.

Low earnings

The outlook for now seems to be that owners must grit their teeth and hold out for stronger rates.

Spot rates have remained almost static since the start of 2021 and this has forced some owners to idle and lay-up ships to cut losses.

The short-term outlook is uncertain. Frontline Tankers said on Aug. 26 that it expects the average daily time charter equivalent rates for VLCCs in Q3 to hit $14,000, down from $15,000 in Q2 and for Suezmax TCE rates to decline from $11,000 to $9,800.

The recent sell-off in crude markets brought on by the surge in the cases of COVID-19's Delta variant has shifted the expected timeline of tanker market recovery from Q4 2021 to 2022,when pre-2020 OPEC+ production is anticipated to return to the market and demand picks up, according to a Suezmax owner.

Long-awaited oil production rises have not translated into sustainable increases in global crude exports, tanker company Euronav said on Aug. 12.

Persistent localized outbreaks of COVID-19 have continued to curb economic activity, which has slowed the return to the full pre-pandemic oil demand.

For the tanker market, increases in production need to translate more fully into exportable barrels, Euronav said.

There are some glimmers of bullishness. Suezmax owner Nordic American Tankers successfully concluded six-month time charter contracts at $17,000/d on July 19 and Aug. 25, the company announced on Aug. 26. "The rate levels concluded in the last two contracts are significantly higher than what market reports for the spot market suggest," CEO Herbjorn Hansson said.

Analysts at Platts Analytics project oil demand normalization to continue with limited disruptions. Total growth for 2021 is now a moderated 5.4 million b/d on the back of a decline of 9.1 million b/d in 2020.

The analysts expect global oil demand to rise by 4.9 million b/d in 2022, exceeding pre-pandemic demand by 1.2 million b/d. While demand for most refined products will grow beyond December 2019 levels, the analysts still expect global jet demand in December 2022 to stay roughly 5% below that of December 2019.