How much US shale oil production is taken out of service will be a key driver of future tanker shipping earnings, according to the latest edition of ‘Tanker Forecaster’, published by shipping consultancy Drewry.
Tanker operators are pinning their hopes on a rise in US crude oil imports, as domestic shale oil extraction becomes increasingly unprofitable. Low oil prices have made crude extraction unprofitable for many US producers, leading to a fall in US rig counts and shrinking exploration and production investment.
“Continued expansion of refinery capacity in Asia is likely to maintain growth in the global oil trade over the next five years,” said Rajesh Verma, Drewry’s tanker shipping lead analyst. “But demand from Asia alone will not be sufficient to sustain the improvement in tonnage utilisation. The only alternative source of growth is a recovery in US oil imports, especially when declining European refinery capacity will mean lower import volumes to EU countries.”
Following two years of slow growth, the global trade in oil has accelerated over the past nine months due to increased stocking. Drewry expects this trend to continue through to the end of 2016. However, thereafter, the consultancy expected the influence of stocking activity to wane and hence continued development in trade will depend on rising Asian demand and a recovery in US imports.
On the supply side, tanker fleet growth was expected to remain muted in 2015, growing at just 1.3% year-on-year, before gathering momentum in 2016, when vessel deliveries were expected to rise over 60%, compared to this year. Buoyant fleet growth will also be supported by a slowdown in scrapping activity.
“Large vessels dominate the order book and this is a reflection of the expected increase in long voyage trades,” added Verma. “And next year’s opening of the widened Panama Canal will further support demand for the bigger classes of ships.”
Tanker earnings were expected to remain strong on ample oil supply and the resultant softness in bunker prices, Drewry said.
In addition, Drewry Maritime Equity Research (DMER) has started coverage on the Tanker shipping sector with DHT Holdings, Euronav and Nordic American Tankers (NAT).
In 2014, a sharp drop in oil prices transpired in a prolonged contango in the market, which fuelled the demand for oil storage. Consequently, demand for tanker vessels increased, which along with limited growth in vessel fleet resulted in a surge in freight rates.
This showed in recent quarterly results of the tanker operators, exhibiting a sharp recovery in earnings. DMER believed that market dynamics in the short to medium term were slanted in favour of market players, as oil prices were forecast to stay low and oil producers were not expected to cut supply in a hurry in a bid to protect their market share.
However, DMER said that ship operators should be wary before joining the bandwagon to order new vessels as this could lead to a supply overhang in the medium term.
Nikesh Shukla and Rahul Kapoor, analysts at DMER, stated, “We see a positive earnings outlook for the tanker shipping sector with a sustained demand for crude oil backed by higher refinery runs in emerging markets and increasing long-haul trade. We expect tanker companies to continue enjoying a good-run in FY15. However, the risk is excessive optimism leading to a high orderbook build-up, which could soften rates towards the end of FY16.”.
DMER has rated Euronav and DHT Holdings ‘attractive’, while it has maintained a ‘neutral’ rating on NAT because of rich valuation.