The first six months of the year saw an influx of new tonnage into the market. The consequences are now likely to be felt in the second half

Some observers are asking whether the crude oil bubble has finally burst after nearly three years of trading in a global bull market. It is fair to say that a distinct weakening is occurring. Most owners are accepting lower trading rates for spot and time-charter business, so it is accepted across the board that volatility is here to stay. Some remain ever optimistic, but a mini rush of vessels (mainly fixed on charter deals of one to three months) put forward for storage in the hope of selling the oil cargoes when prices rise has simply not succeeded yet.

There is hope that rates may reach WS60 if more VLCCs are taken for storage in the run up to the northern winters in Asia and Europe. It is possible since rates touched WS56 for West Africa to China. China has been cutting back oil consumption even though some 60 VLCCs are on order for Chinese owners as part of China’s bid to be more self-sufficient. This could prove to be a double-edged sword because it is obvious that China will use such ships for international trading as well as domestic business. Such a plethora of newbuilding deliveries will depress hitherto solid charter business with China by overseas owners. But new markets are emerging, reminding once-dominant Middle East producers that they no longer have the playing field to themselves any more.

The second half of 2017 is expected to be tougher

The second half of 2017 is expected to be tougher. Storage is expected to increase as oil prices remain much below what owners would like and OPEC moves provide an upward blip for only a week or two. It seems that cuts in production have little effect these days: the world remains awash with oil. There is no need for crude carriers to worry too much at the moment as the market can handle exigencies of trade, and there is a choice of new markets from this year.

After the long offshore slump there is now evidence of more offshore terminal development, which is a further encouraging feature. Storage will become more viable with VLCCs already employed off South Korea, Japan, China and the North Sea, with an estimated 94-100 million barrels of crude stored. Average charter rates are US$16-20,000 daily for a 30-60 day period. With no port and fuel costs and prepayment, the attraction is obvious for many owners.

Market balance is still about right, but new orders, at the current pace, need closer examination. The first six months of this year produced a bumper total of 35 VLCCs and 15 Suezmaxes. These added a total of 11,089,776 dwt and 2,378,128 dwt respectively to a booming orderbook. Last year’s newbuilding figures were affected by South Korea’s financial problems and subsequent drought for new orders. That has dramatically changed this year as, in terms of order intake, it has been business as usual with the 35 VLCCs dominated by Greek investment accounting for 26 vessels. More business is under negotiation, driven by the inducement of pricing that is hardly moving. A VLCC can still be secured for US$80 million. Some builders still offer IMO tier II engines, which can reduce costs by around US$3 million per ship. Owners also favour series orders, which give more flexibility in price quotations for the builders.

South Korea is making up for lost time with the inducement of earlier delivery slots (due to the preceding drought) than rivals can offer. The big three Korean builders will continue to perform strongly in the second half of the year.

Interest in Suezmax units has cooled

Interest in Suezmax units has cooled somewhat, which is a little puzzling. Some VLCCs are loading cargo for two destinations, hitting Suezmaxes. A key market for the latter is West Africa loadings for China, but these have been hit by a fall in demand from China and new market competition. Varying sulphur content also plays a part. A total of 110 Suezmaxes are on order: they will commission 17,153,620 dwt into the global fleet in due course. By contrast, 33 Suezmaxes have been delivered so far in 2017, against 29 VLCCs.

The order backlog for VLCCs has reached 125 units totalling 39,458,009 dwt, with at least 12 more including options closely negotiating. Against the newbuilding commitments there are currently 738 VLCCs trading (227,004.201 dwt) and 535 Suezmaxes (83,880,313 dwt). It is interesting to note that South Korea accounts for almost half of the global VLCC orderbook.

Recycling is very quiet as pricing is unattractive. Older VLCCs and Suezmaxes will either trade longer in the current bullish climate or take up storage charters. Only two VLCCs have been disposed of so far this year.

The long slump in crude carriers since the financial crisis is evident in statistics that show that VLCC fleet growth is the highest since September 2009. Deliveries were almost zero in most of 2015 and early 2016 on the back of an ordering drought that ultimately contributed to the current bull market and welcome earnings increase.

Secondhand business has been brisk in 2017, pushing up values

Secondhand business has been brisk in 2017, pushing up values. This has tempted both buyers and sellers alike against the background of confidence in the outlook. Thirty VLCCs changed hands in the first half of 2017. Asset play has also been in evidence, but more in terms of bids for whole crude fleets than for newbuilding resales, which do not yield much gain when prices stand still. Two Frontline bids failed, but DHT’s takeover of BW Group’s VLCC fleet was notable. After the deal, BW ordered two newbuilding VLCCs, so it is not withdrawing from this sector completely.

The Qatari boycott has given a boost to Suezmaxes because several VLCCs previously co-loaded oil using Qatari, and charterers have subsequently split VLCC loadings into two Suezmax charters. The squeeze on Qatari exports will only see a modest increase in charter rates, if any.

Most owners ordering new Aframax tonnage are specifying coated tankers for products transport known as LR2 long-range vessels. For the few crude Aframax operators, the situation is tough. One hitherto popular loading country was Venezuela, but the economic situation there continues to spiral into deeper decline. Production in the Orinoco Belt fell from 1.3 million b/d in June to 700,000 b/d in the early part of July, and is unlikely to improve in the uncertain political climate.

VLCCs are now tempted for loadings from the US to Japan

OPEC and some non-OPEC countries that imposed production cuts that were due to last six months are now likely to extend them to the end of 2017 or even into 2018. Fortunately for owners, new markets are taking up a lot of the slack.  The Atlantic Basin has become a focus of increased activity as the US increases shale drilling activity, adding around 350,000 bpd to output. VLCCs are now tempted for loadings from the US to Japan. Much of the extra production will be for export and longer-haul voyages to Japan are another bonus. Sizes of vessels are increasing, even if they are not fully loaded alongside shore terminals. The VLCC Anne, owned by Euronav, recently became the first vessel to partially load directly from a shore berth in Corpus Christi, rather than to utilise smaller vessels in transhipment at sea. More experiments will be undertaken with the goal of handling more VLCC business alongside terminals.

Some nations ravaged by militant attacks or civil war are still exporting crude. The first cargo in five months was loaded by Shell at Forcados, West Africa, with more bookings taken in June. Resumption of production could eventually add 200,000 bpd to the market. Libya’s production reached its highest level since 2014 at 800,000 bpd. So some holes in traditional Middle East production are being filled, but this cannot disguise the tougher market conditions ahead into 2018.