Tankers

Geopolitics or market fundamentals?

What’s really driving tankers to such extremes? BIMCO’s Peter Sand thinks he has the answer

To say that this year has been unpredictable would be an understatement, but the fact that for much of 2020 freight rates have taken little to no notice of the poor market fundamentals leads one to question whether or not fundamentals are still relevant and important to understanding the tanker shipping market.

The past 12 months have shown just how important geopolitics are for the tanker shipping market. Twice freight rates have been sent soaring on the back of changes, not of changes to the fundamental market balance, but rather due to political posturing. On the whole from 1 September 2019 to 31 August 2020, average earnings for a VLCC stand at $70,000 per day, with noticeable peaks at$307,888 per day on October 11 2019 and$279,259 per day on March 13 this year. Though October 2019 to many now feels like an eternity away, tanker owners are unlikely to have

forgotten the spike that was brought to freight markets by amongst other things US sanctions on certain shipping companies and tankers, as well as the high tensions in the Middle East at the time. Though the world was in a different situation in March 2020, it was once again political decisions that led to the second spike in tanker freight rates, as the oil price war broke out after the expanded OPEC+ alliance was unable to reach an agreement on supply cuts, leading to demand for oil and therefore tanker shipping being brought forward.

So, is the fundamental market balance still important? At BIMCO we believe it is. While geopolitics will continue to play an important factor, the fundamentals will kick in between these flare-ups, which will certainly still occur, but less frequently and likely having a more limited effect than the two we have seen in the past 13 months. This could already be seen in early September when freight rates for a VLCC fell to $6,103 per day, as the lower demand sets it.

BIMCO expects the freight market to remain challenging for the tanker shipping industry for the next 12 to 15 months, as demand will only return to pre-pandemic levels slowly. In its latest report, the EIA estimates that global oil demand in 2021 will remain 1.8m barrels per day lower than in 2019. The oil price war also brought a lot of oil demand forward, bunching it up in the second quarter of the year, and leaving lower levels left for the rest of the year, as stocks built up then are now being drawn on.

These expectations are based on the fundamentals in the market, a fall in demand while the fleet continues to grow (as of 1 September +2-5% for the crude oil tanker fleet and +2.1% for the oil product tanker fleet), means freight rates will fall. Could geopolitics once again swoop in and lift rates? Probably, but it is unlikely to have as dominating a role as it has in the past year. The world is in a different situation and with the US election in November we may once again see geopolitics return to the shadows where it has less of an effect on oil tanker shipping. ●