Keeping tanker fleet growth in check

The tanker market has started to show its first signs of weakness, driven by challenging conditions in capital markets and tight credit availability – not to mention Canada’s wildfires, which have already knocked out some 1.5m barrels of daily oil production. However, there is still money to be made, analysts believe.

While the lasting effects of the wildfires on the tanker market remains relatively unknown, the difficulties in capital markets and with credit availability, and the resultant reduction of newbuilding activity, might actually bode well for tankers, BIMCO and Drewry agree. 

The tanker market is expected to be oversupplied in the next two years due to hefty deliveries and relatively slow growth, so a sustained slowdown in ordering will be needed to keep fleet growth in check and subsequently help the longer-term health of the market.

“The tanker market may be only shipping market that is profitable for the time being,” explains BIMCO. “This makes it even more positive to note that the money made is not immediately being ‘put to work’ in a traditional sense, by placing orders for new ships.”

Subdued activity

The crude oil tanker fleet is approaching a four-year high of new capacity and all eyes are, therefore, on the pace of these deliveries as they will inevitably put some downward pressure on freight rates.

Only 4.35m dwt of crude oil tankers out of BIMCO’s expected 21.4m dwt for the full year have been delivered, which buoyed the freight market in the first quarter. Still, this marks the highest quarterly volume of newbuild deliveries for almost three years. Meanwhile, eight tankers were ordered in the first quarter of 2016, five of which were for product tankers. Only one VLCC had been ordered by mid-April, a sharp contrast to the 66 new VLCC orders placed in 2015.

Demolition activity has been low as well with only nine tankers built between 1977 and 1995, and with a total capacity of 414,000 dwt, taken out of the fleet. For the full year, BIMCO expects 6m dwt of tanker tonnage to be demolished, mostly crude oil tankers. Mid-term, BIMCO says the supply side for tankers looks “heavy”. For oil product tankers, it expects the fleet growth to come down in 2016 and 2017, based on current orders and a continued slow uptake of new orders. And, for crude oil tankers, BIMCO predicts 2017 will surpass 2016 on all parameters: new deliveries, demolition and net fleet growth.

Scant ordering bodes well for business

Drewry Shipping Consultants shares this generally positive outlook for the tanker market despite growing concerns around newbuilding activity. It noted that while tanker orders have dropped off, this slowing trend needs to be sustained for the longer-term health of the market.

“After numerous orders in recent years, newbuilding activity in the tanker market declined sharply in the first quarter of 2016 as only 34 vessels were ordered during the period,” says Drewry, “far below the hefty 368 vessels ordered in 2015.”

Challenging conditions in capital markets as well as tight credit availability from banks has subdued new ordering. According to Drewry, however, this will not arrest the strong fleet growth and corresponding decline in freight rates over the next two years because many vessels are scheduled to be delivered in 2016-17. “It bodes well for the future,” says Drewry, “especially if this is a reflection of cautious ordering by owners.” Still, it adds, if the current decline is simply a breather after the hefty ordering in 2015, any increase in ordering in the coming months will hurt the longer-term outlook for the tanker market. 

Drewry also notes that despite the slowdown in ordering in the first quarter of the year, the total orderbook remains high at 63.7m dwt, or 18.6% of the crude tanker fleet. Almost 80% of the vessels in the order book are scheduled to be delivered in the next two years, and more than 200 crude tankers by the end of 2017, it says.

Rajesh Verma, Drewry’s lead analyst for tanker shipping, commented: “Newbuilding prices declined during the quarter on account of the slowdown in tanker ordering, which coincided with weakness in newbuilding activity in other sectors as well, keeping prices under pressure. If ordering remains weak in the coming quarters, newbuilding prices could soften further.

“The tanker market is expected to be oversupplied in the next two years due to hefty deliveries and relatively slow growth in the crude oil trade. If the slowdown in ordering continues further, it will keep fleet growth in check in the later years, which in turn will support tonnage utilisation in the tanker market.”

Canadian disruption

Of course neither outlook takes into consideration the potential impact of Canada’s wildfires, which have already put enormous pressure on US oil tanker imports, knocking out some 1.5m barrels of daily oil production. Subsequently, US consumers have been forced to find alternative supplies after the drop in Canadian pipeline supplies. This is at the very least expected to drive tanker imports and freight rates going forward.

With most Canadian oil sand crude piped to the US, local importers will need bigger seaborne imports, mostly into the Gulf of Mexico, adding to existing port congestion. And while crude stored in North America could be used to overcome some of the disruption, tanker imports and freight rates are likely to rise, according to shipping experts.

Trygve Munthe, co-chief executive of Norwegian-based tanker own DHT Management, suggested to Reuters that, to compensate for the shortfall, the US needs to either ramp up other imports or draw down on inventories. The first alternative would be good for tankers now, while the second is perhaps more positive in the longer term.

Latin American and Middle East producers, meanwhile, are seen as the most likely to supply substitute oil. With Venezuela facing stalled production, Colombia and Ecuador could be likely substitutes for Canadian crude as they produce similar heavy grades. Should Canada’s outrages persist however, Middle East suppliers would be the only ones with enough spare capacity to step in and provide support.

For now, North American storage could meet some of the lost production and Canada’s oil sands facilities have been left largely undamaged. Restarting shuttered production, however, is expected to take several weeks after fires have been distinguished, even with no damage at all. 

Whether or not the shake-up caused by Canada’s wildfires has any lasting effects on the tanker market as far as hindering BIMCO and Drewry’s generally positive outlooks, however, remains to be seen.