Archives for posts with tag: Oil Trade

In last year’s half year shipping report, we reported on an industry that “must do better”. With the ClarkSea Index averaging $10,040 per day in the first half (up 2% y-o-y but still 14% below trend since the financial crisis) there are still many subjects (sectors) struggling for good grades as our Graph of the Week shows. But are there some that are showing a bit more potential?

Don’t Rest On Your Laurels!

A year on from record lows, bulker earnings remain below trend (defined as the average since the financial crisis) but are showing signs of improvement. Capesize spot earnings moved from an average of $4,972/day in 1H 2016 to $13,086/day (75% below trend versus 33% below trend). Indeed, based on the first quarter alone, Panamax earnings moved above trend for the first time since 2014 and we have certainly seen lots of S&P activity. The containership sector has responded to the Hanjin bankruptcy with another wave of consolidation (the top ten liner companies now operate 75% of capacity) and some improvements, albeit with lots of volatility, in freight rates. Improved volumes, demolition and the re-alignment of liner networks, helped improve charter rates and indeed feeder containerships rates have moved above trend for the first time since 2011. Although some gains have been eroded moving into the summer, fundamentals for both these sectors suggest improvements in coming years but it may be a bumpy road!

Dropping Grades!

After solid marks in last year’s reviews, the tanker sectors tracked here have moved into negative territory compared to trend, with the larger ships feeling the biggest correction as fleet growth, particularly on the crude side, remains rapid and oil trade growth slows. Aside from a small pick-up in the LNG market in recent weeks, the gas markets remain weak, with VLGC earnings 42% below trend. Some increased activity, project sanctioning and investor interest has not yet taken offshore off the “naughty step” .

Still Top Of The Class?

The only sector significantly above trend for the first half is Ro-Ro, with rates for a 3,500lm vessel averaging euro 18,458/day, 42% above trend. There also continues to be strong interest in ferry and cruise newbuilding (the 2 million Chinese cruise passengers last year, now 9% of global volumes, is supporting a record orderbook of USD 44.2bn, as is the interest in smaller “expedition” ships). We must also give a mention to S&P volumes that are 60% above trend (51m dwt, up 50% y-o-y) and to S&P bulker values which improved 25% in the first quarter alone.

Showing Potential?

Upward revisions to trade estimates have been a feature of the first half, and we are now projecting full year growth of 3.4% (to 11.5bn tonnes and 57,000bn tonne-miles). Although demolition has slowed (down 55% y-o-y to 16m dwt), overall fleet growth of 2.3% is still below trend but an increase on 1H 2016 (1.6%). While there has been some pick-up in newbuild ordering to 24m dwt (up 27% y-o-y), this remains 52% below trend. Last year we speculated on an appointment with the headmaster – still possible but perhaps this year extra classes on regulation and technology? Have a nice day.

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It’s now more than a year since the tanker market took off. In mid-2014 tanker earnings picked up and since then have been in the $30-$40,000/day range. But the market remains nervous. This tanker pick-up coincided with a slump in dry bulk earnings, which is interesting because on paper bulkers and tankers both seem to have surplus capacity. So why are tankers doing so much better than bulkers?

Long-Term Premium

On an “all sizes average” basis tanker earnings generally exceed bulker earnings (the tanker “basket” contains a greater share of larger ships). For example, between 1990 and 2015 to date tanker earnings averaged $24,996/day, whilst bulkers earned $13,933/day. That gives tankers a 79% premium over bulkers. During the seven years since the Credit Crisis, the premium has remained. Tankers have earned $18,281/day, compared to bulkers’ $12,427/day, a 47% premium. So the “premium” relationship held, even during a period of deep recession.

Earnings Distribution

However, during the period of recession tanker earnings have swung from below to above “average premium levels”. To illustrate this point we have estimated what tanker earnings “should have been” over the last seven years if they had followed the “average premium” relationship with bulker earnings over the full period back to 1990. This relationship was estimated using a regression equation as a “rule of thumb”, using monthly data for the period 1990 to 2015, and then used to estimate tanker earnings since 2009 from bulker earnings, shown by the red line on the graph.

For the first five years tankers underperformed compared to the long-term “average premium” versus bulkers, with the blue line, showing actual earnings, below the red line. But in 2014 they started to exceed the expected premium as bulker earnings dropped and tanker earnings increased. Currently tanker earnings offer a significant “bonus” above the estimated “norm”, at levels about six times higher than bulker earnings.

More Than One Answer

So what’s going on? The first answer is that tankers are playing “catch up” for the bad run early in the recession. But there are other answers to the question. One is that in 2015 oil trade has grown much faster than expected, increasing by 4% compared with only 2% expected earlier in the year. Another is the oil price collapse from over $100/bbl to close to $40/bbl, creating an opportunity for arbitrage by holding oil in ships, in anticipation of a price increase. Additionally, of course, bulkers have suffered from an absence of demand growth this year.

The Usual Suspects?

So there you have it. The tanker boom has gone on longer than many might have anticipated and tanker earnings are outperforming their long-run relationship with bulker earnings. But a “fundamental” surplus remains and investors might be right to be cautious. Scrapping has almost stopped, ordering has picked up and supply growth is set to increase. So, enjoy it while you can, and remember that it’s partly a game of catch up. Have a nice day.

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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”.

Potential Paradigms

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.

Disappointing Demand

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.

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