The tanker markets experienced an extremely volatile second quarter as the coronavirus pandemic threw all oil-related markets off-kilter says S&P Global Platts Analytics. Based on current market conditions outlined in the note they are not expecting rates to recover in the near term. The new report notes that rates on some routes swung from record-highs to record-lows in just a matter of months
S&P expects that freight rates are likely to stay largely steady and soft in the coming months with a typical summer lull as the oil market gradually rebalanced. They predict that freight rates for the dirty tankers market will likely remain under pressure until the OPEC cuts are reversed.
“Spot rates in most vessel groups hit new lows for the year as deeper-than-expected OPEC+ production cuts and less demand for floating storage have not been sufficient to accommodate surplus tonnage,” says S&P.
Rates for VLCCs on a West Africa-Far East voyage started the quarter near record-highs of over $70/mt before the oil price war coincided with a huge collapse in oil demand due to the pandemic. As the OPEC+ group decided to undertake its largest output cut ever in response to the demand slump, freight rates started their journey back down to earth.
Cargo deficiency and unsupportive floating storage economies caused support to vanish in the tanker market. In fact, as Dated Brent prices recovered in value, charterers were increasingly reluctant to place oil on tankers given less-attractive economics. By the end of June West Africa-Far East VLCC rates were languishing at one-year lows of $12.79/mt, a fall of over 80 percent from early-April.
S&P also highlights the rush to floating storage in April estimated to have reached a peak of just over 200 million barrels of crude and condensates by mid-June. With volumes starting to fall by the end of the month it started to add pressure on the spot market and will likely continue doing so in the coming months. They also predict that the coming quarter will be characterized by the drawdown in the storage on smaller vessel sizes, which will occur over six to nine months. The bulk of Aframaxes on floating storage in the Mediterranean is estimated to unwind in the July-August period putting further pressure on spot freight throughout the summer lull.
“The coming quarter is likely to prove arduous for shipowners at first, with the potential of a recovery as economic activity resumes after the summer holidays,” says S&P. It proceeded to highlight that rates were reported averaging at bottom levels in all regions west of Suez, with July volumes so far trending down from an 18-year low June in the VLCC market.
The situation has already proved more complicated for Aframaxes West of Suez with the steep fall in Russian crude exports out of the Baltic and Black Sea, along with a decline in Kazakhstan and Azerbaijan loadings, severely reduced the amount of cargoes on the market. Similarly, S&P reports that shipowners in the North Sea and Baltic have struggled to cover operation costs in a market where the low output from Russia has caused freight rates to plunge to nearly unsustainable levels. The situation is similar in the Mediterranean, with minimal returns causing shipowners to sit idle instead of competing for cargoes with negative returns.
The report concludes, however, that not all predictions are negative for the coming quarter. Given the exceptional character of the first half of 2020, the summer months S&P Platts says might see a robust uptick in economic activity, spurring demand for crude as inland storage unwinds.
