Challenges ahead for the tanker market in 2021Posted on 13 Jan 2021
Senior Director SSY Consultancy & Research
After tumultuous trading conditions in 2020, where tanker rates accelerated to multi-year (and on some routes record) highs before rapidly plunging, 2021 is set to be a challenging year for the tanker market. It will grapple with crude production changes, still high oil inventories, refinery closures, a new US government and potential foreign policy shift, an overhang of tonnage after low scrapping in 2020, and of course how oil consumption continues to recover following the Covid demand destruction and rollout of vaccinations.
Crude production changes Changes in oil production policy in response to accelerating Covid cases will create volatility and uncertainty for the tanker sector. OPEC+ increased its production quota by 500K b/d for January 2021 and subsequently agreed a further 75K b/d increase in February and March. But this was down from a previous plan of a 2M b/d rise that would have lowered production cuts to 5.8M b/d, meaning still substantial reductions in cargo volumes. A surprise announcement by Saudi Arabia of a unilateral output cut of 1M b/d in February and March will only add further downward pressure to tanker earnings near-term. Low oil-price related cuts to non-OPEC production this year have also altered the growth path of cargo volumes. For instance, the US was expected to be a major driver of crude tanker tonne-mile demand growth in the coming years, but after peaking in February at 3.7M b/d, US crude exports had fallen to average around 2.9M b/d in 4Q, US Energy Intelligence Administration (EIA) showed. Still Atlantic basin non-OPEC oil supply will be underpinned by sustained flows of Brazilian crude and Norway ending government-imposed oil cuts. With Atlantic basin refinery closures and run cuts, a surplus of Atlantic crude could be prime for shipment to Asia, which has recovered faster from the Covid outbreak and is adding new refining capacity, especially in China. This may offer much needed pockets of underlying support for some of the crude tanker sectors.
US foreign policy shifts ahead Under President Trump, the US had placed more stringent sanctions on oil producers Venezuela and Iran, which sharply reduced their trading opportunities, export volumes and domestic production. A Biden administration would seek a return to the multilateral nuclear deal with Iran, resulting in a loosening of sanctions. Refiners have replaced lost Iranian crude with predominantly other Middle East Gulf crudes and Russian Urals. OPEC+ would have to adapt its supply quotas to accommodate more Iranian oil. One of the main downsides for the crude tanker market would be the return of Iran’s tanker fleet. These ships have largely been utilised for storing oil since sanctions were imposed and if these vessels start delivering Iranian oil to refiners again, it will take trade away from the rest of the fleet. The US stopped importing Venezuelan crude in June 2019 which cut regional trading opportunities for Aframaxes and smaller tanker sizes while China and India had reduced their imports from Venezuela on larger tankers in 2020 under pressure from the US. Any relaxation of sanctions here may allow more tankers that had previously been restricted to resume shipments from Venezuela, mainly to Asia, due to oil-for-aid deals.
Refinery closures an opportunity for product tankers With the reacceleration in lockdowns at the end of 2020 and into 2021, major oil forecasters, such as OPEC and the International Energy Agency (IEA) have lowered the pace of recovery in oil consumption for 2021 despite the rollout of vaccinations, which will take some time to reach critical mass. Dampened oil use will weigh on product tanker activity but there could be some positive opportunities from a wave of refinery closures, as weak margins put refineries under greater pressure. The closures are mainly concentrated in the Atlantic basin, with these facilities facing increasing competition from the larger, more sophisticated refineries that have petrochemical facilities coming on-line in the Middle East Gulf and Asia.
In 2020, refinery capacity of 1M b/d was confirmed as closing or due to close in the future in N.America, 600K b/d in Asia and nearly 600K b/d in Europe, according to SSY estimates. Further facilities earmarked for closure amount to up to 3M b/d in Europe, 600K b/d in Asia and 600K b/d in N.America. Given the regional product supply imbalances these closures will create, especially as refiners have been reconfiguring their output slate due to the plunge in airline jet fuel demand, there is scope for more longer haul demand for product tankers. Tonnage overhang into 2021 Tanker removals in 2020 (through scrapping or conversion to other vessel types such as FPSOs) were at their lowest level in 30 years, which means the tanker market will enter 2021 with a growing surplus of tonnage.
Ships will continue to return from floating storage and newbuild tankers will arrive, with Aframax and MR deliveries set to be the largest across the clean and crude sectors in terms of numbers. Demolition should accelerate given sustained weak earnings and a rise in scrap values and based on the age profile of the fleet, there is scope for many older ships to be removed in 2021.
You can read our full 2021 Outlook here.
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