Last week, VLCC spot returns hit their lowest level since October, 2014.
TCE earnings for Middle East/Japan (TD3) fell close to $20,000 per day.
The weakness was essentially driven by the build-up of available tonnage, leaving charterers with healthy numbers to choose from, Gibson Research reported.
However, is this a temporary blip or are there more fundamental forces at play?
Gibson examined the main drivers of the VLCC market both last year and thus far in 2016 to see what has changed.
Last year, the spectacular strength in all crude tanker markets was underpinned by very limited growth in supply coupled with major gains in demand. This demand was supported by notable gains in Middle East crude exports and strong refining margins, which stimulated trade to existing and new markets, as well as commercial and strategic storage.
At the same time, the overhang of crude oil production over demand not only ‘pushed’ surplus barrels into floating storage but also resulted in sizeable delays/inefficiencies in tanker transportation.
In the first half of this year, crude tanker demand benefited from a major increase in Iranian crude exports. In addition, floating storage continued to rise, Gibson said
At the end of May, the number of non-trading VLCCs (including tankers employed in storage of Iranian crude/condensate) reached 9.5% of the existing fleet. However, at the same time we were also starting to see stronger growth in tanker supply.
For example, the VLCC market saw 20 new additions thus far this year, the same as for the whole of 2015. Deliveries in the Suezmax segment were more restricted, yet the Aframax fleet witnessed the biggest growth, both in terms of new deliveries those vessels crossing over from the clean segment.
Furthermore, the Suezmax and Aframax markets have underperformed thus far this year relative to VLCCs, capping their earnings’ potential.
Crude oil production disruptions in Nigeria caused the most damage to Suezmax demand, but long haul crude trade WAF/East has somewhat eased.
Finally, tight tanker supply/demand fundamentals in 2015 enabled owners to take advantage of falling bunker prices; this year charterers are gaining an upper hand and rising bunker prices are gradually eroding owners’ profitability.
What should we expect in the second half of this year?
The pace of deliveries is expected to accelerate. Between July and December, 2016, 35 VLCCs are scheduled for delivery, although some slippage is anticipated, taking into consideration the turmoil in the shipbuilding industry.
Furthermore, the market may see NITC tonnage starting to compete for spot VLCC cargoes in the latter stages of this year.
On the demand side, any further increases in crude exports out of the Middle East will be supportive to trading demand; however, at the moment the scope for further increases appears to be limited.
This, coupled with the anticipated strong seasonal increase in oil demand, continued decline in US shale and ongoing production outages in a number of countries around and the world, suggest that oil markets are likely to move to a much more balanced position during the second half of this year.
Although, inefficiencies in transportation and tanker storage are unlikely to disappear overnight; nonetheless, storage demand is expected to wane.
The above indicates that VLCCs could face rough seas ahead, Gibson said.
The weekly rate roundup appears below.