Dirty tanker markets face reality check after boom busts: Fuel for Thought

The tanker markets experienced an extremely volatile second quarter as the coronavirus pandemic threw all oil-related markets off-kilter, with rates on some routes swiveling from record-highs to record-lows in just a matter of months.

But with the oil market gradually rebalancing and the summer lull kicking in, freight rates are likely to stay largely steady and soft in the coming months. And according to S&P Global Platts Analytics, freight rates on the dirty tankers’ market will likely remain under pressure until OPEC+ cuts are reversed.

“Spot rates in most vessel groups hit new lows for the year as deeper-than-expected OPEC+ production cuts and less demand for floating storage have not been sufficient to accommodate surplus tonnage,” it said.

Rates for VLCCs on a West Africa-Far East voyage started the quarter near record-highs of over $70/mt before the oil price war coincided with a huge collapse in oil demand due to the pandemic. As the OPEC+ group decided to undertake its largest output cut ever in response to the demand slump, freight rates started their journey back down to earth.

Cargo deficiency and unsupportive floating storage economies caused support to vanish in the tanker market. In fact, as Dated Brent prices recovered in value, charterers were increasingly reluctant to place oil on tankers given the less-attractive economics.

By the end of June West Africa-Far East VLCC rates were languishing at one-year lows of $12.79/mt, a fall of over 80% from early-April.

Storage fatigue

After a rush to floating storage in April amid land-based storage exhaustion, floating barrels were finally starting to fall, albeit slowly, as a flatter Brent structure amid a measured demand recovery was occurring on the oil market.

The crude and condensate held on floating storage was estimated to have reached a peak of just over 200 million barrels in mid-June, with volumes starting to marginally fall by the end of the month.

This slowdown in storage has started to add pressure on the spot market and will likely continue doing so in the coming months.

The coming quarter will be characterized by the drawdown in storage on smaller vessel sizes, which will occur over six to nine months. The bulk of Aframaxes on floating storage in the Mediterranean is estimated to unwind in the July-August period, according to market participants, putting further pressure on spot freight throughout the summer lull.

Some of the barrels in floating storage have been associated with logistical bottlenecks in China, US and Europe, but analysts and shipping sources expect these to ease in the third quarter.

Under pressure

The coming quarter is likely to prove arduous for shipowners at first, with the potential of a recovery as economic activity resumes after the summer holidays.

But rates were reported averaging bottom levels in all regions West of Suez, with July volumes so far trending down from an 18-year low June in the VLCC market.

The situation has already proved more complicated for Aframaxes West of Suez. The steep fall in Russian crude exports out of the Baltic and Black Sea, along with a decline in Kazakhstan and Azerbaijan loadings, has severely reduced the amount of cargoes on the market.

Shipowners in the North Sea and Baltic have struggled to cover operation costs in a market where low output from Russia has caused freight rates to plunge to nearly unsustainable levels.

Rates on the benchmark Cross-UK Continent route, basis 80,000 mt, plummeted to over a nine-year low of $5.29/mt, or Worldscale 70 on June 9, Platts data showed.

The situation is similar in the Mediterranean, with minimal returns causing shipowners to sit idle instead of competing for cargoes with negative returns. Sources said rates were likely to stay soft unless there were more cargoes on the market, especially from Libya, where production remains thwarted due to the civil war.

However, not all predictions are negative for the coming quarter. Given the exceptional character of the first half of 2020, the summer months might see a robust uptick in economic activity, spurring demand for crude as inland storage unwinds.

“If oil demand returns quickly, the tanker market will likely be strong once oil inventories have normalized,” analysts at Poten & Partners said in a recent note.

“If demand growth stalls, the tanker market will be affected but, in contrast to most other demand declines in the past, the current tanker fleet has a relatively modest order book and an age profile that allows for a relatively quick recovery,” Poten & Partners added.