Gibson: VLCCs Outearning Suezmaxes in 2015
Rising West Africa to Europe crude trade, dramatic increases in spot fixtures out of the Middle East Gulf and a more active Caribbean market had helped the Suezmax market outperform Very Large Crude Carriers (VLCCs) for most of last year, but the tide has turned in 2015, UK shipbroker EA Gibson says in its Weekly Tanker Report.
While demand increased, Suezmax supply remained largely flat last year, with the average fleet size expanding by just 2 units, leading to even better returns than last year, with earnings on TD20 well above average levels seen in the previous six years, says EA Gibson.
Suezmax owners’ sentiment is strong, with much greater resistance to downside pressure when chartering enquiry is limited.
Nonetheless, Suezmax earnings started to lag notably behind VLCC returns. In April alone, average TD20 earnings were around USD 36,000/day compared to USD 62,500/day for TD3. Is this change in market dynamics between two tanker classes a temporary mismatch in the supply/demand balance or is it due to a more fundamental reason?
Supply appears to be ”in check,’‘ says EA Gibson. Although robust earnings are likely to lead to a slowdown in the demolition activity, the increase in the Suezmax trading fleet this year is still expected to be very limited. Net growth in supply is projected at less than 1% due to a very modest number of deliveries.
Demand indicators also remain positive, although the scope for further increases is limited in the immediate future. The ongoing conflict in Libya continues to support Suezmax trade from West Africa to Europe. Given the great degree of political instability in the country, it is unlikely we will see the speedy return of Libyan barrels to the market, according to EA Gibson. There are also major concerns about the infrastructure damage and how long the repairs will take should the political situation improve.
In the East, Gibson says the picture for Suezmax trade is bit more clouded. The total number of fixtures out of the ME Gulf so far this year has remained at similar levels witnessed in 2014 and well above the volumes traded back in 2013 (primarily due increases in Iraqi crude output). However, the trade pattern has changed; with less longer haul and more short haul trade. Most notably, there has been a sizable decline in spot fixtures to the West offset by increases in shorter haul fixtures to India.
The prospects for further gains in Iraqi crude production in the near term are limited. Many believe that the country’s oil output will remain largely flat this year and new production targets will be very challenging to achieve in 2016, not least due to infrastructure bottlenecks and a cumbersome approval process for field development. More importantly, the collapse in oil prices from over USD 100/bbl significantly reduced oil sales revenues making it much more difficult for the Iraqi government to repay oil companies and to invest into further expansion, Gibson reports.
On balance, any major increases in Suezmax demand this year are unlikely, but gains in supply will also be marginal, says Gibson.
As such, the status quo should be maintained, with the Suezmax market as usual remaining perceptive to the developments in other crude tanker segments.
With VLCC earnings currently at USD 57,500/day, the downside risk appears limited, but it is uncertain how long this ”boom” will last, says Gibson.