Tanker owners had a blast in the spring: nations around the world went into lockdown, oil demand slumped, and hundreds of millions of barrels of excessive supply had to be stashed somewhere—offshore. Now, tanker rates are plummeting, and while industry insiders believe there is a light at the end of the tunnel, it is a long tunnel.
The tanker market is in “cash burn mode”, said the chief executive of Diamond S Shipping, as quoted by Lloyd’s List. The amount of oil in floating storage has fallen significantly since this summer, thanks to OPEC+ cuts and a recovery in demand in China and, to a lesser extent, India. As a result, there is now a surplus of free tankers, which has brought daily freight rates—and consequently revenues and profits—down from the record high the industry enjoyed this spring.
The immediate future looks even bleaker. Winter is normally a strong season for tanker owners, but this winter may buck the trend, at least according to Maritime Strategies International. The research firm warned last week the end of the year, like the whole year, is likely to be quite far from normal.
“Weak Q4 conditions may confound some views that markets would see ‘normal’ seasonal gains, but 2020 is far from normal, and seasonal patterns can be discounted,” MSI said in a report, as quoted by Hellenic Shipping News. “With renewed lockdowns being enforced across many countries in Europe in Q4, oil demand is going to take a further near-term hit.”
Diamond S Shipping had a similar message in its third-quarter report, released last week.
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“Tanker market conditions are expected to remain under pressure during the fourth quarter of 2020, driven by weak demand for crude oil and refined products as a result of the global pandemic,” the company said. “The typical seasonal market strength is expected to be muted as oil inventories continue to draw from onshore storage and demand has not materially recovered.”
Belgian Euronav shares the view that this winter will be unusually weak for the tanker industry, attributing this to continued OPEC+ cuts that have shrunk supply and to still depressed demand for oil and oil products.
“A growing divide between rising short-term fleet supply and limited cargo availability, restricted by OPEC+ production cuts and a slower demand recovery for crude, has impacted the sector negatively and is likely to continue throughout the seasonal winter period,” said the chief executive of the Belgium-based company, Hugo de Stoop, in Euronav’s third-quarter report.
If that was it—three months of subdued demand for tankers—the industry would weather it easily. However, tanker operators are not particularly optimistic for the next 12 months as a whole.
“If you look at India’s consumption today and you look at China’s consumption today they are back to pre-coronavirus levels, super-positive, but we need the rest of the world to follow suit,” said Diamond S Shipping’s Craig Stevenson, as quoted by Lloyd’s List.
The most important question for the tanker industry is how long the depression in demand will last, really. It’s the same question that keeps OPEC heads awake at night as well. Because based on the way things look now, it could be a while, despite OEPC+’s efforts.
Freight Waves’ Greg Miller called it a hangover in an October analysis. Tanker shippers had a party in the spring, with freight rates hitting $250,000 per day and more. Then, the time for the hangover came, and despite hopes that it would be a quick one, with oil demand rebounding before this year’s end, it has remained depressed as the coronavirus rages on.
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Oil in floating storage as of early November had fallen to the lowest in eight months, Argus Media reported three weeks ago. The good news as this was for oil producers, it was not so good for tanker owners and operators. In further bad news, China’s oil imports have started to decline from the record highs hit earlier this year as the world’s biggest importer filled up its storage space. The decline will likely continue because even though its oil demand has rebounded to pre-pandemic levels—or near pre-pandemic levels—demand for fuels remains weak in China’s regional market.
There seems to be one glimmer of hope for the tanker industry for the near term, and it is the same as the glimmer of hope for oil producers: a vaccine. The recent positive news about two vaccine candidates caused tanker industry executives to perk up as an effective and safe vaccine would mean a return to normal at some point. However, due to the massive work involved in distributing vaccines to a few billion people, this return to normal will take quite a while, and during that time, tanker shippers will have to remain in survival mode. The hangover after the spring party will be a lengthy one.