ArgusMedia Viewpoint: Americas crude tankers sag to extend

Crude tankers scheduled for delivery at the beginning of the year will meet anticipated lower crude output from Opec producers, whose 1.2mn b/d cut agreement goes into effect starting January, potentially extending a trend of freight cost drops for dirty tankers in the Americas. Key spot rates reached multi-year lows in the summer of 2016.

“2017 will see lower returns [for shipowners] than in 2016, but estimates of $20,000/d [for VLCCs] are probably on the low side given the returns we are seeing this late into December”, said Court Smith, head of research at shipbroker MJLF.

Crude tankers, whose rates are highly sensitive to regional supply and demand imbalances, have led a rally in the last month largely on the back of increased crude purchases ahead of the planned Opec cuts.

Currently numbering 684 ships, the VLCC fleet is expected to grow 5.2pc next year, according to data from shipbroker Charles Weber. Surging past the 2mn bl tankers, the number of 1mn bl Suezmax ships will jump roughly 10.7pc from the current fleet size of 460 vessels. Global Aframax/Long Range (LR2) and Panamax/LR1 fleets will expand at a slower pace, rising 7.5pc and 2.9pc next year respectively, according to Charles Weber.

It is unlikely that demand will be able to absorb the newly arriving vessels, which shipowners will have to charter out at discounts until they are proven.

“Assuming oil production remains relatively flat, especially given the Opec announcement, I expect crude tanker rates to deteriorate during the year”, said Noah Parquette of JP Morgan.

Any cut in Opec production is negative for the crude tanker market, said Smith. Lower production generally means fewer crude cargoes that need to be moved, resulting in reduced tanker demand.

But mitigating the expected drop in rates is the higher share of long-haul crude tanker routes that may come with the dip in Opec exports. With 78pc of the cuts distributed to the Middle East, according to Charles Weber, Asia-Pacific buyers may replace those lost barrels from more distant regions such as west Africa, Brazil, the Caribbean, and the US.

“[Declining production from Opec] will incentivize US production, driving more west African oil to the Far East. It will also encourage more US crude exports, which benefits Aframaxes and Suezmaxes”, said Smith.

The resulting increase in average journey length could itself be a source of additional demand as tonnage will be tied up for longer, tightening global supply.

Despite a recent uptick in rates, the surplus of dirty tankers on the water has already exerted considerable downward pressure on the market. From the beginning of July to mid-December, the average spot rate along the key Caribbean-Singapore VLCC route was $3.66mn lumpsum, down 35pc from the average of that time period in the previous three years.

Source: Argus (http://www.argusmedia.com/news/article/?id=1375453)

Author: gasparem

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