Tanker Rates Firming Up: Frontline

The middle of the first quarter in 2019 saw tanker rates firming significantly, driven mainly by an increase in US exports, said Frontline Ltd. is the world's largest oil tanker shipping company.

The tanker market pulled back in January due to OPEC production cuts and a high level of newbuilding deliveries after a strong end to 2018, it said.

The market then came off primarily due to extended refinery maintenance in preparations for IMO 2020 and both new and persistent supply disruptions.

Atlantic refinery maintenance is currently coming to an end and East of Suez refinery maintenance is coming off of peak levels.

Crude oil demand forecasts remain healthy and largely unchanged since the start of the year. In particular, demand from China and India remains robust, more than offsetting weaker demand growth from Europe.

Concerns exist, however, about the sustainability of demand growth in a rising oil price environment and the impact of global trade tensions and tariffs on growth also remains to be seen.

While current supply disruptions do not appear to have impacted demand thus far, they have contributed to recent tanker market weakness and increased tanker rate volatility. Exports also continue to be disrupted by sanctions in Venezuela and unrest in Libya.

Recently, Russian production has also faced a challenge due to contamination in a high capacity crude oil pipeline to Poland and Germany. Additionally, the U.S. announced that it would not renew waivers previously granting relief from sanctions primarily to Asian countries for Iranian crude oil imports.

According to the U.S. administration, the U.S., Saudi Arabia and the United Arab Emirates will work to ensure global markets remain adequately supplied, but OPEC has not formally announced its intentions.

Although daily U.S. production has grown year-over-year each month since the first quarter of 2017, production has declined since the start of 2019, potentially impacted by spending cuts made by producers in response to a rapid decline in the price of crude oil in the fourth quarter.

While U.S. production continues to benefit growth in tonne-miles, further production growth is dependent on continued capital expenditure on the part of exploration and production companies. The underlying dynamic in crude oil supply will almost certainly lead to the continued evolution of trade flows and volatility in freight rates.

Crude oil tanker supply is obviously a key factor in the tanker market. In 2018, scrapping kept pace with new deliveries, but the pace of scrapping slowed significantly as freight rates improved in the fourth quarter.

Only one VLCC was recycled in the first quarter of 2019, with an additional two vessels reported recycled since the end of the quarter. This compares to 20 VLCCs delivered in the first quarter and an additional six delivered in April.

There are 49 additional VLCCs scheduled to be delivered in 2019, but some of these deliveries will be pushed back into 2020, when a further 40 VLCCs are scheduled to be delivered.

"In the second half of 2019, we expect tanker rates to rebound as refinery maintenance is expected to be less pronounced than last year as refineries will look to increase production ahead of the implementation of IMO 2020 regulations," Frontline said.

Transported crude is currently down 2 mb/d from the first quarter of 2018, but all indicators point towards volumes returning and draws on inventories halting as refinery maintenance completes.

According to market analysts the IMO 2020 regulations could create incremental demand for crude oil as increased inputs will be required to meet the expected demand for low sulphur fuel.

Despite continued deliveries of newbuilding vessels, effective crude tanker capacity is expected to slow as vessels are taken out of service for regular dockings, scrubber or ballast water installation and preparation of vessel fuel tanks for the IMO 2020 regulations.

"We expect the market to remain volatile this year, but continue to trend higher as the fleet prepares for new regulations, US exports contribute to tonne-mile growth and crude oil volumes return," it said.