The tanker markets have been plagued this year more than ever, by a continuously growing fleet of new building vessels, clogging up the world's seas, in a time when demand for oil has been lagging, as the world's economic growth is stagnating. As a result, tanker owners are left to look for new ways of inducing demand for their new behemoths, like the VLCC crude carriers. According to the latest report from Poten & Partners, an ominous milestone was reached last week for the tanker business of VLCCs, when the Baltic Exchange marked five-year double-hull VLCC resale prices at the vessel’s lowest level since their panel started reporting such values almost ten years ago. "The number of VLCC fixtures, however, was higher than ever before. Not surprisingly, years of overbuilding continue to drag down rates, largely overwhelming any demand gains. Although there is a case that the supply picture could improve in the medium term, storm clouds remain in the short term, given a final surge in VLCC deliveries in early 2013, combined with stabilising Chinese crude oil imports and rising global crude inventories that could pressure OPEC production levels" Poten said.
The report added that "despite the gloom in VLCC asset prices, refiner demand for crude oil has risen in 2012 and is approaching record levels of 75.5 mbpd during 4q12, representing a 850 kbpd year-over-year (yoy) jump for the quarter. As shown in the chart on the following page, strong refining margins from tight mid-distillate inventories supported third quarter crude runs, relative to typical declines from seasonal maintenance. The rebound in Chinese crude runs is a major contributor to higher global runs, due to refinery expansions completed late in the year and from improved refining margins following a September rise in official retail prices. The increase was also in order to rebuild product stocks that were reportedly depleted earlier in the year, but runs should stabilise in early-2013, as stock levels recover" it claimed.
Poten went on to mention that "a result of increased refiner demand, VLCC spot liftings out of the Arabian Gulf reached a level of 141 in November. The availability of vessels over the next 30 days has also stayed below its 12-month average for the past two months. This supply and demand disparity, while partially seasonal, is more pronounced than the same phenomenon experienced at this time last year, likely due to Chinese crude run increases. Spot rates have in turn begun to recover from the abysmal levels reached this summer, but perhaps not as much as crude demand and spot tonnage supply and demand pictures would suggest on their own.
An overheated VLCC newbuild market in recent years precipitated a substantial drop-off in utilization rates, the lingering effects of which explain record low vessel resale values and low spot rates in relation to demand growth. Persistently languishing rates should be signalling owners to high levels of available tonnage and produce a more modest order book and accelerated scrapping over the next few years, but there are near-term 1q13 deliveries that have been pushed back from their original delivery dates in 2h12 that threaten the recent rate increase" it noted.
Poten concluded that "oil prices have additionally begun to show softness, which could prompt OPEC to cut production, a bearish development for VLCCs. OPEC crude production is still above 31.1 mbpd, bringing global liquids supply near 91 mbpd. Versus expected 4q12 demand of 90.1 mbpd, OPEC’s production stance is generating a rare fourth quarter inventory build. With an expected seasonal decline in 2q13 oil demand, to 89.4 mbpd, the call on OPEC crude would slip to 29.1 mbpd, suggesting a 2 mbpd build in global oil stocks at current OPEC crude output. Following an unusual fourth quarter inventory build and AG fixtures that suggest an additional build in 1q13, OPEC may need to cut production to keep prices in line, should refiners decide to stop building stocks.
The recent seasonal movement in spot VLCC rates is both welcome and unsurprising. Although medium-to-long-term hope is emerging for the VLCC market, storm clouds persist in the short-term by way of the confluence of seasonal crude run declines, the potential for OPEC production cuts, and a wave of VLCC deliveries" it concluded.