Oil price influence on tanker earnings

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By Kishan Muthu, Oil Tanker Analyst, SSY Research

Tanker earnings have typically been at their strongest when oil prices have been low. Here we show the inverse relationship between earnings of VLCCs on TD3C (Middle East to China) and the Brent crude price. In general, since 2014, low oil prices have correlated with a spike in tanker earnings on TD3C, and this has been largely a function of the development of China’s economy, oil refining industry and energy security given its appetite to purchase large volumes of crude at low prices.

This year, earnings on TD3C have largely been in negative territory and are set to be the lowest annual average since SSY records on this route began in 2013. The low earnings environment in 2021 has been driven by weak fundamentals. The resurgence of Covid infections, particularly in Asia, has been detrimental to VLCC earnings. Whilst the lack of tanker removals and the drawdown of floating storage across 1H21 increased the pool of vessels competing for cargoes. But rising oil prices too appear to have been a factor, specifically for China, which has seen crude imports fall on an annual basis so far in 2021. With oil prices rising the country has drawn down on the domestic stocks it built in the low oil price environment of early 2020. Additionally, China’s imports have been capped by greater oversight by Beijing on the country’s independent refiners, which included limits and delays to crude import quotas, as well as the introduction of consumption taxes on light cycle oil and mixed aromatics that increased feedstock costs and therefore reduced margins.

Looking ahead, rising oil production from both OPEC+ and non-OPEC members presents a downside risk to higher oil prices but should benefit tanker earnings by increasing cargo volumes. However, the recent news of potential SPR releases from several countries as a way to manage inflationary pressures and cool oil prices actually poses a very real risk of suppressing tanker earnings as we move into the new year. The US has announced that it will release 50M bbls of crude oil from its SPR in a coordinated effort with other major oil-consuming countries. Additionally, India has announced a 5M bbls SPR release, while the UK has authorised companies to voluntarily release up to 1.5M bbls of oil reserves. South Korea, Japan and China have confirmed that they will participate, however volumes and timings are yet to be disclosed. Although the drawdown of stocks would be negative for tanker earnings in the near-term, stocks will have to be rebuilt further down the line which will be constructive for the earning environment.  

Source: SSY, ICE


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