Dynamarkets Monitor - Virus responses lead to a reshuffled tanker trade
The coronavirus pandemic instigated an unprecedented social, economic and political shock around the world. While there has been no uniform approach and the size and nature of the shocks has varied, trading patterns for almost all countries have been impacted. The reorientation of markets and supply chains is now becoming evident and this is especially true for the tanker market. The high levels of volatility seen through the early months of the year, leading to truly incredible earnings, followed by the boom in both onshore and floating storage will continue to shape the tanker markets, across the varying vessel size ranges, for months to come. When taking in combination with ongoing geopolitical wrangling and trade tensions, the tanker trade at the close of 2020 could look very different to a year before.
Entrenched trade flows have been impacted by both demand and supply shocks in recent months, with these shocks, at times, occurring simultaneously leading many importers and exporters are having to look elsewhere for optimum markets. When these market dynamics are then given a geopolitical dimension following, sometimes controversial, policy decisions, including voluntary supply cut agreements as evidenced by the OPEC Plus Declaration of Cooperation earlier this year, the results can be somewhat transformative.
Firstly, taking the largest crude oil tanker segment, the VLCCs. The VLCC trade is largely driven by Chinese and other Asian demand. The vessels are a significant contributor of ton miles in the tanker trade and often ply some of the longest voyages to make the most of the available economies of scale. Such trades would often include from the US Gulf and the Middle East. As a result of the historic low oil prices through the first and into the second quarters of this year, Chinese demand in particular, sky rocketed as refiners and traders sought to enjoy the exceptional period, as a result, the tanker market witnessed and earnings and oil storage bonanza. The longer-term impacts of this period are only now becoming evident with lengthy queues and waiting times at major Chinese oil ports and storage drawdowns, both from onshore and floating storage, mean that incremental demand increases are not having to be met from new supply. As such, ton mile demand is set to reduce drastically, at least in the short term, although the removal of tonnage through lengthy waiting times could see rates remain resilient.
Furthermore, as a result of political agreements, such as the energy purchase aspect of the China – USA phase one trade deal, it is likely that Chinese imports from the US increase while China has also looked to Brazil for its crude importers, another very lengthy trade. Overall, the trend within the VLCC market appears to be consistent short term fluctuation and the rapid reorientation of trade flows to exploit lower prices and open markets, avoid COVID hotspots or politically motivated restrictions or to meet the ever changing demand picture worldwide. Whereas in previous years, these trends would play out over a longer period with entrenched trade routes sometimes holding the volatility at bay as shippers and carriers fell back on long standing agreements and market dynamics.
The changes are not limited to the largest vessels, with the Aframax segment also seeing a considerable shift in trading activity. The Aframax fleet remains dominant in the Atlantic basin as the trade routes tend to be shorter in distance, such as around the Mediterranean, from West Africa to Europe or from Russia to Europe. However, as a result of the OPEC Plus supply reductions, the volume of exports from Russia to Europe and elsewhere has dropped considerably, while the US Gulf has picked up some of the slack, notably increasing ton mile demand. Elsewhere, according to the analysis by Poten & Partners, the Aframax segment has seen a significant increasing in employment for lightering and reverse lightering in the US Gulf. Moreover, following a high level of conformity with the historic supply cut agreement reached earlier in the year, bearish sentiment has returned regarding the potential for oversupply in the markets. It is understood that a number of OPEC Plus members may be readying themselves to ramp up production through August and September. Estimates suggest that Russia could add around 1.5 million b/d in August when compared to recent output levels. Furthermore, US shale producers are also likely to increase output, perhaps generating a further source of downward pressure on oil prices and export opportunities, particularly in the Atlantic.
In conclusion, the short-term nature of the trade pattern shifts means that it is likely that the market will see far more uncertainty and volatility in the coming months as major markets move into the Autumn and Winter months. Meanwhile, Europe is already seeing a resurgence in the number of COVID-19 cases, which could put further pressure on already struggling industrial activity and oil demand drop. Overall, it remains to be seen whether some of the trends highlighted in this article will become more entrenched or whether the new normal is a state of flux and ever-present short termism with shippers, traders and importers all willing to be and having to be more flexible.