The global pandemic, closely followed by Russia’s invasion of Ukraine, is reshaping supply and demand fundamentals for oil and gas against a backdrop of record-breaking prices and volatility. In China, a zero-Covid policy adds to global logistics logjams, stoking inflation that has curbed a post-pandemic economic recovery.
The fleet of some 8700 crude and product tankers (over 10,000 dwt) is caught between a rock and a hard place: the geopolitical agendas of national oil and gas producers and regulators’ decarbonisation targets for a zero-emissions shipping pathway that more rapidly transitions to greener marine fuels.
None of this is positive for rates and earnings. One New York investment bank covering the sector described tanker rates as “putrid” in February and forecast that seven of the eight listed tanker companies it covered would post losses in 2022. The Ukraine invasion has further crushed expectations that the pace of oil demand growth would rise and help lift rates for crude and product tankers to end a protracted 18-month earnings slump. Larger tankers are expected to earn rates below cash-breakeven throughout the year until supply and demand fundamentals begin to improve in 2023 and 2024.
New York tanker consultancy McQuillings Services forecasts 2022 earnings for the 860-ship fleet of very large crude carriers at $11,000 daily, but only for the newest, most economical, scrubber-fitted tankers. Elderly tankers would earn $2,500 daily, well below daily operating costs of $9,800. About one third of the VLCC fleet has scrubbers fitted, allowing them to use cheaper, higher-sulphur marine fuels. Better earnings are projected for smaller tankers. Although timecharter equivalent rate estimates exceed operating costs, they barely cover industry cash-breakeven levels.
The size of the tanker newbuilding orderbook, as well as uncertain short-term and medium-term crude and oil products demand underpin a bearish outlook. Verified orders for tankers over 10,000 dwt stand at 515 ships, or 55.6m dwt, according to March figures from London shipbroker Braemar ACM. Of these, 185 were ordered over the past 15 months. Most of the 300 new tankers (33.2m dwt) forecast for delivery this year were ordered pre-pandemic, Braemar ACM data show. In 2023, fewer tankers will join the trading fleet, a drop of 20% measured by deadweight.
Newbuilding orders are slowing amid uncertainty over International Maritime Organisation decarbonisation targets and how these may affect investments. Carbon-free future fuels aren’t yet commercially available, and fossil fuels like LNG have been challenged as a transition fuel. About 16% of the tankers on order have some form of dual fuel or alternative propulsion, mostly using LNG, or can be converted to be ammonia or LNG-ready. The result is a tanker orderbook-to-fleet ratio that is now said to be at the lowest in more than 20 years. Newbuildings on order total some 6.5% of the trading fleet of 873.8m dwt, or about 8,700 tankers. The ratio is higher for larger crude tanker types and medium range product tankers, the workhorse of the product tanker fleet.
Even if newbuilding orders pick up, the lead time for deliveries is longer than anticipated. Shipowners have already filled available slots in Asian shipyards over the past 18 months with orders for containerships and other vessel types. Record-breaking freight rates for container ships that have generated more than $110bn in profits for container lines have fuelled the orderbook boom. Demand for liquefied natural gas carriers also generated new orders, while an unexpected rebound in bulk carrier rates over 2021 improved shipowner and investor confidence and saw orders increase.
Tankers, including pure chemical tankers, comprise some 20% of the global shipbuilding orderbook by volume, according to data from the consulting division of Lloyd’s List Intelligence. Container ships comprise 12%, and bulk carriers 22%, data show. While LNG carriers account for 3% of the total orderbook, the 160-plus ships on order represent the highest fleet-to-orderbook ratio for any segment, given the existing fleet stands at some 670 vessels.
The supply of tankers is complicated by the high number of vintage vessels aged 20 years and older that have been deployed on US-sanctioned Venezuela and Iranian oil trades to China and Syria. About 200-plus older tankers that would normally be scrapped are tracked participating in these parallel trades, taking about 3% of overall market share. This has not only distorted the age profile of the larger crude fleet but inflated fleet numbers. Added to this complex supply picture are a series of wildcards that suggest further headwinds. This includes whether three-year-old Iranian or Venezuelan US sanctions on oil and shipping sectors will be lifted, or if new Covid variants emerge to dent oil demand growth.
Already, the Ukraine war is expected to reduce Russian crude and product exports by 2.5m bpd, about 4% of global seaborne shipments. This removes 60% of all the country’s crude shipments, and 33% of diesel exports from the market, based on International Energy Agency estimates released in in mid-March. Saudi Arabia and the United Arab Emirates, the only producers with spare capacity, have declined to take up the slack, leaving oil prices elevated.
The IEA warned in a monthly oil report in March that large-scale disruptions to Russian oil production threaten to create a global oil supply shock. The Paris-based agency downgraded oil demand estimates for 2022. Sanctions on Russia are adding to energy pricing pressures and recalibrating energy commodities trade flows. A US ban on Russian oil and oil products begins in April. The UK plans to stop all oil and gas imports by the end of the year and has banned Russia-linked ships from its ports. Europe’s 27-member countries plan to phase out two-thirds of imported Russian oil and gas by 2030.
Crude and oil prices at 13-year highs rule out floating storage. Commodities traders chartered record numbers of tankers for oil and oil products storage over a six-month period in 2020 in response to the demand shock which saw prices plunge. The situation now has reversed. The difference in price – or spread -- between the high spot prices for crude and refined products like jet fuel, diesel, gasoline and gasoil and the lower future price is so wide, there’s no financial incentive. Floating storage of crude and condensate is now largely left to VLCCs and suezmax tankers owned by Iran’s National Iranian Tanker Co, which cannot trade due to US sanctions.
Medium-term, the transition to green energy will also weigh on tanker demand, not just newbuilding orders. The BP Energy Outlook, a widely regarded annual report on global energy, has crude demand largely static until 2025 until it begins to decelerate. This translates into steady seaborne exports, leaving only tonne-mile growth to provide opportunities to expand demand for the tanker fleet. Tonne-miles are measured as volumes carried by distance travelled and are a proxy for vessel demand.