Crude Tanker Spot Rates Soften

Crude tanker spot rates improved significantly during the fourth quarter of 2018, spurred by both winter market seasonality and positive underlying supply and demand fundamentals.

According to a stock exchange announcement from Teekay Tankers, in the fourth quarter of 2018, OPEC crude oil production rose to 32.4 million barrels per day (mb/d), the highest level since July 2017 and up from 31.4 mb/d earlier in 2018.

Most of this increase came from the Middle East, where higher production levels more than offset lower output from Venezuela and Iran. Russian oil production reached a record high 11.5 mb/d by the end of 2018, which was positive for mid-size tanker demand in the Mediterranean / Black Sea and Baltic Sea regions.

"Rising U.S. exports also supported tanker demand, with U.S. crude oil production reaching a record high 11.7 mb/d and crude oil exports reaching 2.5 mb/d during the fourth quarter of 2018. This was positive for both crude tanker demand, as well as lightering demand in the U.S. Gulf," said Teekay Tankers.

Crude tanker spot rates have softened through the first quarter of 2019, which is typical for this time of year as refineries enter into seasonal maintenance programs.

OPEC supply cuts are also weighing on crude tanker demand, with OPEC (plus select non-OPEC partners) pledging to cut production by 1.2 mb/d starting in January 2019. Early data suggests that OPEC is achieving high compliance with these cuts, which is negative for crude tanker demand in the near-term.

Venezuelan crude oil production could also decline in the near-term due to impending U.S. sanctions, though this may be offset by longer voyage distances as Venezuela looks to sell its oil into other markets, such as Asia.

Teekay Tankers expects OPEC cuts to have a negative impact on tanker demand through the first half of 2019; however, looking ahead to the second half of 2019, with well balanced oil markets,  it believes that OPEC will increase production when oil demand is expected to increase substantially versus first half 2019 levels, driving positive crude tanker demand.

The global tanker fleet grew by just 5.7 million deadweight (mdwt), or 1.0 percent, in 2018, which was the lowest level of tanker fleet growth since 2001. High tanker scrapping was the main driver of low fleet growth in 2018, with a total of 22.4 mdwt removed, representing the fifth highest scrapping year on record.

Looking ahead, Teekay Tankers expects an increase in tanker fleet growth during 2019 as a firmer freight rate environment should lead to relatively fewer vessels sold for scrap. The Company forecasts total tanker fleet growth of approximately 3.5 percent during 2019, with much of this growth weighted towards the first half of 2019.

The tanker company  expects this will further add to pressure on the tanker market during the early part of 2019, although it paves the way for much lower fleet growth in the second half of 2019 and into 2020, when the Company forecasts that the global tanker fleet will grow by less than 2 percent.

Global oil demand remains firm, with a forecast of 1.4 mb/d growth in 2019 (average of IEA, EIA and OPEC forecasts). Furthermore, the Company expects that tanker demand will be boosted in 2019 by an increase in global refining capacity.

According to the IEA, a total of 2.6 mb/d of new refining capacity will come online in 2019, which is the largest annual increase on record. This should be positive for both crude and product tanker demand. The Company also expects that the new IMO 2020 regulations will be positive for tanker demand, as it may lead to an increase in refinery throughput.

The new regulations could also open up a number of new trade patterns and arbitrage opportunities for both crude and product, which would be beneficial for overall tonne-mile demand. Finally, new pipeline capacity to the U.S. Gulf Coast is expected to result in increased U.S. crude exports during the second half of 2019 from approximately 2.5 mb/d at present to approximately 4 mb/d, which is expected to contribute to both crude tanker demand and U.S. Gulf lightering demand.

In summary, Teekay Tankers believes that OPEC supply cuts, higher fleet growth, and the impact of seasonal refinery maintenance could weigh on tanker demand through the first half of 2019.

However, it believes that this will give way to a much stronger second half of 2019 and 2020 due to strong underlying oil demand, an increase in U.S. crude oil exports, the return of OPEC crude oil supply, lower tanker fleet growth, and the positive impact of IMO 2020 regulations.