Asia-Pacific tankers’ freight outlook weak for Q4 on poor demand

Asia-Pacific tankers’ freight will likely remain weak during the final quarter of 2020 due to subdued demand and even the usual Northern Hemisphere winter and floating storage is unlikely to provide significant support.

According to market participants S&P Global Platts spoke with in Seoul, Tokyo, Singapore, Mumbai, Oslo and Copenhagen, the current quarter looks challenging for both dirty and clean tankers freight.
This year, the odds are stacked up against a strong winter market, though a few abnormal disruptions to seaborne logistics will provide volatility, said Copenhagen-based Peter Sand, BIMCO’s Chief Shipping Analyst.

VLCC freight on the benchmark Persian Gulf-China route is reeling around this year’s low at 26.5 Worldscale points, down from w230 in mid-March, S&P Global Platts assessments showed. Daily earnings have declined to $8,000 from $270,000, brokers said.

Lesser trade in crude and oil products has resulted in piling up of tonnage and is keeping freight under pressure.

As there is a large global surplus to get rid of, OPEC plans to cut down crude output by 7.7 million b/d between August and the end of the year. Since a VLCC can carry two million barrels of crude, this translates into 2.5 less supertankers being needed each day, or 75 in a month.

The key here is the oil inventory overhang which affects normal trading because charterers have plenty of time to take ships, said Ole-Rikard Hammer, an Oslo-based senior analyst with Arctic Securities.

To be sure, the current overhang in oil inventories, is already down 30% from the peak it hit during summer but it will take few more months before the surplus is cleared, Hammer said.

“One bright spot” is all main exporters such as Saudi Arabia, Russia, Iraq and the US have had higher trade flows in September, but it is insufficient so far, he said.

This is evident from the monthly spot VLCC cargoes loading in the Persian Gulf. During June-September these were 90-95 each month, down from 160 and 127 in April and May, according to brokers’ estimates.

There are three VLCCs available for loading every cargo in the Middle East, said Sunil Thakur, a broker with Singapore-based Straitship Brokers.

The current trend of weak demand is expected to continue for the next few months because refineries have cut output amid poor margins while the world struggles to battle the deadly coronavirus pandemic. Analysts describe the virus outbreak and its subsequent devastating spread as a dark horse which has made conventional forecasting of energy freight extremely difficult.

With winter approaching, “we will enter uncharted territory regarding the virulence of COVID-19,” the IEA said in a report in September. Last month, the market was in a state of delicate re-balancing and now the outlook appears even more fragile, it said.

The IEA has revised its oil demand outlook for this year lower by another 300,000 b/d and now forecasts a contraction of 8.4 million b/d, due to renewed concerns over the deadly coronavirus. The Paris-based agency said at 91.7 million b/d, demand this year is estimated at 2013 levels. The oil refining is likely at a seven year low when the global VLCC fleet has expanded by 50 million dwt, equivalent to more than 165 VLCCs, according to shipping industry estimates.

Lack of demand has resulted in a situation where several cargoes are either stuck at destination ports, waiting for a discharge order, or held by trading companies and refiners with the hope that they will be able to sell them some day at a higher price. However, not all of this hope rests on sound economic fundamentals.

Floating storage of oil and oil products has recently picked up, but this is due to logistical reasons, rather than any forward trading opportunities, said BIMCO’s Sand.

The overall floating storage volumes have declined since end-July, he noted.

In oil products, such storage is somewhat bearish. Last month, at least eight newbuild VLCCs were taken on short-term time charter of up to six months with options to store products, sources said.

This could remove up to 60 spot Medium Range size cargoes from the market, significantly reducing demand for clean tankers. MR freight rates are already under downward pressure due to a dearth of demand and with the new super tankers being snapped up for storage the trend could be reinforced.

A major concern among the tanker owners is that the current weak phase in spot tankers market will most likely spill over into next year though modest gains are possible in short crest-and-trough cycles where congestion and ullage in ports such as China’s Qingdao temporarily reduce the tankers’ supply. When shore tanks are full, ships take a longer time to discharge cargoes and this increases the turnaround time for their next voyage.

Several times this year, between a dozen to two dozen VLCCs are seen waiting to discharge cargoes at Qingdao alone, but as BIMCO’s Sand pointed out, this is due to logistical constraints rather than any floating storage.

Nevertheless, there is a silver lining. Once the pandemic ebbs, road and aviation transport will pick up and increase the demand for gasoil, gasoline and jet fuel. The oil products may move before crude because the main focus of refiners is to clear the product inventory first in order to improve their margins, said Hammer.

Gasoil shipments to Australia from East Asia are also strong due to its use to mine iron ore and can provide some support to Medium Tankers.
Source: Platts