By Rebecca Galanopoulos Jones, head of research, Alibra Shipping Ltd.
Demand uncertainty has been behind much of the freight rate volatility that we have seen in the tanker market this year. Since the floating storage boom earlier this year where the period market experienced record breaking highs, rates have now taken a different trajectory and over the course of the summer we have seen some crude tanker routes fall to multi-year lows as cargo volumes plummeted as production cuts from OPEC+ took hold and vessels booked for storage at the peak of the market became available. Questions were raised over the pace of oil demand recovery as the world economy restarts following the pandemic, despite news from OPEC and its allies would once again increase production. However, although external factors have caused much unpredictability for tankers this year, there are some reasons for optimism that could signal a rebound before the year ends.
This year geopolitical issues have had a profound effect on the market in the first half of this year rather than the traditional seasonal movements. Period rates have come off since the floating storage spike but averages for July are only marginally lower than for the same period last year. The average rate for a VLCC for one year in July was $31,100/pdpr* compared to the $34,400/pdpr July average for 2019, to put this in context the average for July 2018 was just $20,280/pdpr. The current stagnant market for tankers reflects the usual ‘summer lull’ seen at this time of year.
The current crew crisis is presenting a humanitarian issue with many crews stranded around the world following quarantine measures in various countries. In China there are reports of this impacting port congestion and causing lengthy discharge times which is having a short-term impact on vessel supply. In addition, more than half of the VLCCs currently still in floating storage are estimated to be idling in Chinese waters further impacting port congestion and adding to the delay in winding down floating storage.
As the oil market surplus from earlier this year is likely to be drawn down by the end of the second half of 2020, this will signal more vessels becoming available on tonnage lists. However, from this month OPEC and its allies intend to relax the imposed production cuts as demand slowly recovers, which is expected to increase demand for tankers. OPEC recently announced a 97% adherence to the production pact in July from members.
The recovery of oil demand is largely dependent on a return to some form of normality following the pandemic. The August monthly outlook from OPEC predicts that oil consumption will surge to 97.6 million b/d, this figure is still lower than pre-pandemic levels but indicates a sharp recovery from the lows seen in the second quarter of 2020 and assumes that Covid-19 will be contained globally with no further disruptions to the global economy. The latest oil market report from the IEA highlights that oil demand from China is recovering strongly, up 750 kb/d year-on-year in June.
The pandemic has had a profound effect on the way that people work, and with so many having worked so effectively from home in recent months, the necessity for the daily commute and international travel has come in to question, as outlined by the latest report from the IEA, and this will undoubtedly have an impact on oil demand and eventually on the tanker markets.
Rebalancing of the market remains delicate and it is clear that geopolitics is leading sentiment rather than the usual seasonality thanks to the uncertainty surrounding Covid and ongoing threat of a ‘second-wave’ and further lockdowns. The norther hemisphere winter season traditionally lends support to tanker freight rates due to increased demand and logistical delays caused by weather issues. This combined with the gradual return of oil demand in line with the easing of lockdown measures is expected lift the tanker market as we approach the typically stronger fourth quarter.
