Panel anticipates market upturn 

By Carly Fields

 

China is viewed by market analysts as the last impediment to strong oil demand and while it’s hard to be positive for the first half of 2022, the second half could see robust recovery. 

Speaking at the Baltic Exchange Tanker Market Insights Webinar at International Energy Week, Henry Curra, global head of research at Braemar ACM Shipbroking, described China as the “only laggard in the system”. 

He questioned how long China would be able to sustain a ‘no Covid’ policy and anticipated an opening up of China in line with other countries that have relaxed restrictions.

Added to which, oil prices in excess of $100 per barrel are expected to lead to an opening up of OPEC, a surge in US shale production and a ramp up in Atlantic basin production, all of which will fill the supply gap, Curra said.

Fellow panellist Claire Grierson, head of tanker research at Simpson Spence Young (SSY), noted that there are still many challenges to China’s demand recovery. While China has been the biggest driver of oil demand for many years, SSY statistics show that last year, Chinese crude import tonne-miles were lower for the first time in approximately 20 years.

“So, if we were just looking at a demand perspective for somewhere like China, I don't know that this year they're going to get back to the import levels that we saw in 2020. That was a big stock building year,” she said. 

Grierson listed the hurdles to Chinese demand recovery as independent oversight on refineries, reduced independent quotas, and cleaner refinery mandates because of the Beijing Olympics. “That's a little bit of a challenge, plus there is the potential for a strategic petroleum reserve (SPR) release.”

However, she did see potential for an import recovery as the market moves through the year. 

SSY calculated that the major importers of crude in the fourth quarter of last year, including China and India, recorded imports that were down about 2.5 million barrels per day in the fourth quarter of 2021 from pre-pandemic levels. “We've got to get that volume back in; we're still suffering a bit with this lower volume of supply.” 

While China has been the biggest driver of oil demand for many years, SSY statistics show that last year, Chinese crude import tonne-miles were lower for the first time in approximately 20 years

Supply shifts

On the supply side, Grierson noted that OPEC+ has been underperforming on production quotas, non-OPEC producers have been hit with pandemic price cuts and energy majors have been operating with capital discipline. Here, growth recovery is not expected until 2023 and is expected to come from Latin America, the US, and Canada. “I think that will be positive for the tanker market,” said Grierson. “Pre-pandemic, what was really helping to drive tanker markets was those ballast legs that we were getting for the larger tankers that were having to ballast from Asia into places such as the Black Sea, into the Atlantic Basin, into the US Gulf, into Europe, West Africa.

“We haven't been seeing that, so we've lost that inefficiency in the tanker fleet had actually helped to propel rates.” 

Curra said that while he recognised the issue of supply, he pointed to the “interesting” story on stock. “This massively increases the sensitivity of the market to changes in demand. There's zero buffer to go through and even if demand isn't very strong, you've got a stock rebuild that's very necessary, particularly in the OECD.” That, he continued, can add a large amount whether through SPR rebuild in China or commercial stocks build in the OECD – which could add upwards of 300,000-400,000 barrels a day of demand.

Here, growth recovery is not expected until 2023 and is expected to come from Latin America, the US, and Canada

Scrapping incentives

Adding to the predicted positive forecast for the second half of 2022, Curra pointed to Braemar ACM Shipbroking’s bullish view for removal of vessels. “Even today we've got a lot of 20+ year old vessels that are engaged in the subterfuge trades and have no existence outside those trades. If Iran were to come back, you'd see greater oil supply and you'd see the removal of many, many oil tankers, which would be a very, very strong positive.”

More generally, there are a lot of tankers pushing up against the 17-18-year-old mark. With recycling rates at an historic high there is a strong incentive scrap tankers. 

Looking more longer term, by 2027 Curra noted that the IMO’s Carbon Intensity Index (CII) reporting requirements will be in – with a possibility of greenhouse gases being included in CII – and ships ordered in the supercycle that started in 2007 will hit 20 years old. This will lead to a surge in recycling.

“There are a lot of ‘ifs’ in the short term. But longer term, I think it’s going to be very interesting,” said Curra. He added that he does not expect a surge in tanker ordering because of the peak oil narrative and the yet-to-confirmed demands of the energy transition. “There are too many reasons not to engage with newbuilding, even before you start considering the incredibly high prices. So, I think we've got a pretty constructive long-term outlook as well,” he said.