Seven years into the recession, the tanker market is blazing away, with VLCCs earning over $50,000/day and Aframaxes not far behind. It’s an amazing development which leaves investors pondering whether this is, in Churchill’s famous words, “not the beginning of the end, but maybe the end of the beginning”. Analysts now wonder if it’s worth the risk of going out on a limb and calling “turning point”.
Whatever the outlook, it’s worth pausing to enjoy the moment – and, perhaps, reflect that nothing like this happened in the 1980s. So something has obviously changed, but over the long-term it’s hard to see what it is. Since 2007, the tanker fleet has grown much faster than seaborne oil trade. We know from experience that when there’s an underlying surplus, spikes rarely last more than a few months and paradigm shifts making “this time different” are rarer than hen’s teeth, if not impossible.
Let’s start with the crude oil trade, which fell by 6% from 38.4m bpd in 2007 to about 36.3m bpd in 2014. OECD oil demand has declined since 2007, with North America down 8%; Europe down 12% and Japan down 13%. So there’s not much joy there. Add an extra 4.6m bpd of oil production in North America and seaborne crude imports dropped by 2.1m bpd. Of course, non-OECD imports have increased, as has products trade, but overall the oil trade has only increased 2.8%, from 55m bpd in 2007 to 56.5m bpd in 2014. A tonne-mile approach pushes the growth up to 7.9%, but that’s still only 1.1% pa.
The Flighty Fleet
Meanwhile the tanker fleet has been buzzing. At the end of 2007, when the credit crisis was just getting started, it was 383m dwt, but since then it has grown by one third (126m dwt) to 509m dwt. Of course, macro statistics are always a bit fuzzy, but an increase of less than 10% in trade and 33% in ships tells a pretty clear story that there is probably lots of ‘surplus’ tonnage tucked away.
A Logical Disconnect?
Such a surplus should surely “cap” rates. But clearly this is not happening, so what’s going on? There are a few explanations. Firstly, seasonality; global oil demand was 2.1m bpd higher in Q4 2014 than in Q2. Assuming most of that is translated into trade, that’s a 4% increase which, over a short period is enough to get things started. Add to that the surge in speculative cargoes held at sea, and demand is motoring. Finally, throw in the reluctance of owners to speed up, and the limited growth in the crude tanker fleet in recent years, and the recent rates look more convincing.
Cyclical Or Structural?
So, simple numbers don’t always give you the whole answer, but there’s never any harm in looking at the big picture. If the simple interpretation is right, things might ease off. But the real dilemma is probably the underlying surplus. Are today’s speeds the ‘norm’ for the future? With bunkers at $300/tonne, the answer is “maybe”. But given time, it could well become a key question. Have a nice day.