- Moving into the new year, oil product tanker freight rates have fallen, with smaller vessel sizes earning more than larger ones.
- Falling rates at the start of the year is typical of the season-dependent oil tanker market. Demand is always strong in Q4, reflecting consumption patterns in the major markets.
- Lower Chinese demand and falling oil prices may lead to OPEC further lowering its oil output, having already agreed to trim production in December 2019.
- The coronavirus spread could also derail the otherwise positive effects of “Phase One” of the trade agreement between the US and China.
High fleet growth in 2019 and the coronavirus in China are clouding the outlook for 2020, despite the expected lower fleet growth, writes Peter Sand for BIMCO.
Phase One trade agreement
Across the world, there are signs that global trade tensions are easing: the US and China have signed “Phase One” of a trade agreement.
This importantly avoids further escalation of the almost two-year trade war between the two countries (although on the downside, it also leaves most tariffs in place); the new United States – Mexico – Canada deal has passed into law in the US, with only Canada left to approve it; and a hard Brexit was avoided.
Demand drivers and freight rates
Strong winter demand is fading away and has been reflected in falling freight rates. However, because charters are often fixed months in advance, ships with contracts from Q4 2019 are still earning high rates.
Moving into the new year, oil product tanker freight rates have fallen, with smaller vessel sizes earning more than larger ones.
On 7th February, average earnings for an MR tanker stood at USD 12,531 per day and those for Handysize at USD 19,114 per day.
At the other end of the scale, day rates for both LR1 and LR2 tankers have fallen to USD 7,154 and USD 9,573, respectively. Rates for both Long Range tankers peaked in the last week of 2019.
Chinese crude oil imports continued the strong growth shown throughout 2019, setting a new record. Total imports hit 505.7 million tonnes – up from 461.9 million tonnes in 2018 – or an extra 146 VLCC loads (300,000 DWT).
- Just under half of total Chinese crude oil imports (44% in 2019) are from the Middle East, with imports growing by 11% in 2019.
- Imports from Saudi Arabia, China’s largest seaborne supplier were up 46.9% in 2019, an increase of 26.6 million tonnes. This brought total imports from Saudi Arabia up to 83.3 million tonnes.
- On the other hand, imports from Iran fell to 14.8 million tonnes, just under half the level reached in 2018.
Outlook
The optimism for a seasonally strong Q1 has been eroded by the effects of the coronavirus (COVID-19) and a warm winter in the northern hemisphere.
Following the outbreak the International Energy Agency (IEA) has adjusted its forecast, and now expects global oil demand to fall by 435,000 barrels per day (bpd) in Q1, the first contraction in over ten years.
Furthermore it has lowered its 2020 growth forecast to 825,000 barrels per day, down from 1.2m bpd before the outbreak.
US-imposed sanctions on certain Chinese-owned oil tankers, essentially removing them from the market and creating uncertainty, led to the high freight rates.
But the sanctions were lifted on 31st January and around 40 tankers, more than half of which are VLCCs, have now returned to the market, adding to the pressure created by the 68 new VLCCs delivered in 2019. But this is not the only reason for unpredictability in the sector.
COVID-19 impact
At the time of writing (mid-February), the full effect of the coronavirus outbreak is still impossible to predict. But because of China’s size and importance to the tanker market, any disruptions to its oil trading caused by coronavirus will have a major impact on the tanker market.
Demand for oil products will be directly impacted by restrictions on travel – with air, road and rail transportation all affected in some way – as China shuts off cities in an attempt to stop the virus from spreading.
Furthermore, the extended Chinese Lunar New Year holiday – which delayed the return to full work of many workplaces – has already lowered utilisation rates of Chinese refineries, thereby reducing its demand for crude throughput.
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Source: BIMCO
