Gibson: January Delivers Poor Tanker Returns

Although the crude tanker market expected poor earnings in 2018, the extreme weakness in spot time charter equivalent (TCE) returns in January still left many surprised.

Spot TCE earnings on the benchmark VLCC trade from the Middle East to Japan (TD3) averaged just under USD 13,000/day at market speed last month, an unprecedented level for January since the turn of the century, according to a report from Gibson Shipbrokers.

The performance on key trades for other crude tanker segments was even worse. Spot earnings for Suezmaxes trading West Africa to UK Continent (TD20) averaged USD 6,500/day, while Aframaxes trading across the North Sea (TD7) returned on average USD 4,500/day over the course of last month, in both cases insufficient to cover fixed operating expenses.

“Without doubt, such a poor performance is largely attributable to OPEC-led production cuts, coupled with the rapid growth in the crude tanker fleet,” Gibson said.

Crude production in the Middle East, the largest load region for VLCCs and an important demand source for Suezmaxes and Aframaxes, is now at similar levels relative to volumes produced in early 2016, while the fleet size is notably bigger.

At the start of 2018, the VLCC fleet stood at around 720 units, nearly 80 vessels more than in the beginning of 2016. In addition, back in 2016 a sizable portion of the VLCC fleet was tied up in Iranian and non-Iranian storage. This is no longer the case.

Overall, over 20 VLCCs were released from floating storage duties between January 2016 and January 2018, with the vast majority of these tankers resuming trading operations.

The Suezmax and LR2/Aframax supply also witnessed a spectacular growth, with the fleet size up by 50 and over 75 units respectively over the past two years.

Generally favourable weather conditions in January in a number of regional markets meant less weather driven delays and disruptions, one of the key support factors to the market during this time of the year.

There could still be a few weather driven spikes in rates, particularly in the Northern Hemisphere, however, the rapid fleet growth will continue, as the anticipated pick up in demolition activity will provide only a limited relief from plenty of new deliveries expected to enter the trading market this year.

“To reverse the current fortunes, owners need notable increases in trading demand. At the moment, rising crude exports out of the US is the key area for growth but the industry also needs to see strong gains in exports in other parts of the world,” Gibson concluded.

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