Tanker Markets Endure Political, Economical, Cyclical Turmoil
Ihe tanker market provides a transportation service to rectify imbalbetween the main oil producing and consuming nations. More than 80 percent of crude oil production is moved on a seaborne basis, with trades from the Middle East dominating. In contrast a much smaller proportion of refined products are traded, some representing export orientated refineries, but many being intraregional balancing movements. The larger the tanker the greater the economies of scale — but there are two important limitations. Firstly, ports provide physical restrictions to trade — generally in terms of draft, and secondly, oil is traded in varying parcel sizes which will influence the optimum vessel size.
The largest crude oil tankers (a mere handful) when laden are in excess of 500,000 dwt, but generally the principal traders are VLCCs (here defined as vessels of 200-320,000 dwt). VLCCs find most of their employment trading from the Middle East to Asia, Europe and the U.S. Gulf/Caribbean. Only one U.S. terminal can handle fully laden VLCCs — the Louisiana Offshore Oil Port (LOOP) — and many vessels are lightered off the U.S. Gulf Coast into smaller vessels. Suezmax tankers (defined as 110- 200,000 dwt) are engaged in a range of trades, most usually from West Africa to the U.S.
Gulf/Caribbean or Europe, within the Mediterranean, or within Asia. Aframax tankers (70-110,000 dwt) are employed in shorter regional trades — mainly in North West Europe, the Caribbean, Mediterranean and Asia. Finally, Panamax tankers (50-70,000 dwt) represent a more specialized niche and take advantage of draft restrictions in South and North America, and are heavily employed on these trades.
A number of oil tankers have the capability to carry crude oil or refined products, but it is usual for a vessel to trade refined products. The majority of product tankers lie in a size range from 10-50,000 dwt, with more than 90 percent of vessels in this size range falling into this category. A smaller number of vessels ranging up to 110,000 dwt are also able to carry refined products, usually finding employment from the Middle East to Asia. And there are literally a couple of vessels above 110,000 dwt with products carrying capability, but these are geared for oil companies' specific trades. The level and direction of crude and refined product trades determines the demand for oil tankers.
Changes in trade patterns can have a significant impact on demand. The supply of tankers is derived from the balance between vessels delivered to the fleet (usually from a lead time of around 24 months) and those deleted when they are technically obsolete (currently around 25 years of age, with smaller vessels having a longer life).
The tanker market was characterized by a serious recession through the mid-1980s as a result of high oil prices which curbed oil demand. But in the latter part of the 1980s the scrapping of vessels, combined with renewed oil demand growth, brought the market steadily back into balance.
The market peaked in 1990/91 as a result of the Gulf crisis, and this prompted a surge in speculative orders (i.e. vessels without cargo guarantees).
As a consequence, faltering economic growth combined with an expansion of the fleet in the early 1990s, has resulted in rates once again being depressed. An increase in demolition levels and a slump in orders kept tanker supply in check, and with strong economic growth, the result in the period 1996/97 has been for rates to strengthen appreciably once again.
For several years there has been a perception that, as the tanker fleet ages, a number of vessels will inevitably have to be scrapped. As a consequence it has been anticipated that a strong level of new buildings will be required to maintain the market balance. But the strength in freight rates has merely served to choke off scrapping — as higher incomes allow owners to spend proportionately more on maintaining their vessels, hence extending their trading lives. The start of 1998 has left the market somewhat delicately poised, as a combination of surging oil production and limited additions to the fleet have maintained a reasonable balance in the face of economic uncertainty in Asia and a bulging orderbook. The prospects for the main individual sectors are discussed below.