Demand Uncertainty to keep Freight Rates Low

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tanker

Newbuilding deliveries are bound to exert more pressure to the product tanker market freight rates says Gibson in its latest weekly report.  At the same time, demand is difficult to predict at this stage.  According to Gibson, “it’s safe to say 2016 has been a challenging year for product tanker owners.  2015 benefited from new refineries firing up in the Middle East, strong margins boosting refinery runs and exports, frequent arbitrage opportunities, manageable fleet growth, and at times, the added volatility from refinery outages and weather delays.  2016 saw a substantial turnaround.  Fleet growth accelerated, new export orientated capacity additions almost ground to a halt, demand growth eased back, and refiners implemented heavy maintenance programmes (many deferred from 2015)”, the shipbroker noted.

Gibson also said that “not least, global product stocks have remained a barrier to trade. With all regions high on stocks, pricing differentials, and hence arbitrage opportunities have been limited; even with some major infrastructure issues in the US.  Newbuild crude tankers have regularly ‘eaten into’ product tanker market share by loading clean barrels on their maiden voyages.  Additionally, higher exports from China have competed with seaborne barrels from the Middle East and the West, supporting smaller tankers in the region disproportionately to the global picture”.

According to the shipbroker, “with 2016 effectively behind us, the focus now shifts to what we can expect for 2017.  With some certainty we know deliveries across the tanker market will remain at elevated levels.  In terms of scheduled deliveries, we expect 76 vessels in the LR2/Aframax class, 28 in the LR1 class and 75 in the MR/Handy sector.  It’s also important not to ignore the 69 Suezmaxes, which could compete for gasoil barrels, perhaps even the odd VLCC out of the 51 to be delivered next year.  Some delays will of course take place, however, with such a large orderbook deliveries will remain substantial, even with some slippage”.

Gibson also noted that “whilst fleet expansion may seem relatively clear cut, it is the demand side where the degree of uncertainty is much higher.  Whilst we know that there will be limited support from expanding export refining capacity in 2017, the main issue to resolve in the short term is the stock levels.  Overall, product inventories appear to be falling, however the picture is not clear cut.  In the US, clean product stocks, particularly in the key Atlantic Coast region have generally trended upwards following the restart of the Colonial pipeline and sit close to record highs.  Stocks in Europe have trended downwards following heavy maintenance and lower seaborne imports, notably from the US and Middle East; yet we could see this trend reverse as refiners exit maintenance and flows from the East pick up.  In Asia, stocks in Singapore have come off their summer highs but could once again edge higher following stronger flows from the West and Middle East.  Nevertheless, stock levels should start to ease over the course of 2017 as rising demand, slower growth in refining capacity and weaker margins lead to draw downs.  However much of this ‘rebalancing’ depends on the action of OPEC and its allies.  If meaningful cuts are made and sustained for long enough, oil and product prices could move into backwardation, supporting drawdowns, whilst rising crude prices could weaken refining margins, prompting run cuts in some of the less competitive regions, principally Europe.  Initially drawing down stocks might be painful for owners if these barrels compete with imports.  However, such action is a necessary evil that must be completed for the market to find a sustainable footing once again, where global product imbalances drive tonne mile demand forward”.

Gibson concluded its analysis by noting that “we do however have to be mindful that many analysts expected the market to rebalance over 2016, which proved premature.  Could the collective action by OPEC and its allies fall apart? Would this prompt a renewed fight for market share, higher refining margins, higher runs, a stronger contango and rising stocks? It remains to be seen but the risk has to be factored into any decision”, the shipbroker noted.

Meanwhile, in the crude tanker market this past week, in the Middle East, Gibson said that it was “a more cautious week from VLCC Charterers as December needs became closed out and January confirmations awaited.  Despite that, Owners maintained, and slightly built upon, their previously solid position so that rates held at up to ws 87.5 to the East and into the low ws 50’s now to the West.  Upcoming holidays will compact the next fixing window into a shorter time-frame, and busier times are forecast.  Owners will be alert to securing another step higher if Charterers do indeed come shopping in concentrated numbers. Suezmaxes started slowly, but once West Africa sparked, ballasting away became attractive and a finer balance then moved rates higher to close to ws 100 East, and ws 60 to the West with big premiums still payable for Iran liftings”.

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Source: Gibson

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