Tankers

Calling the rebound

Tim Smith from Maritime Strategies International looks at how, where and when a recovery might materialise

Q1 2021 saw the oil tanker market hit rock bottom with earnings very similar to mid2018. MSI believes, for spot earnings, Q1 21 will represent the low point of the market downturn, with improving levels seen across the rest of 2021 and potentially much better rates in the second half of the year. For the period market we see limited further loss of altitude in a market which has already been severely downgraded.

The tanker market could see conditions improve above and beyond the MSI Base Case as well. MSI has begun publishing extended quarterly tanker spot forecasts on the MSI HORIZON platform. These spot projections do start to see significant upside movement before the T/C rates, but they are coming from a very weak position early in 2021.

As the market transitions from a low environment at the start of the forecast to a more solid footing and (eventually) strong conditions, we see the spot earnings exceed T/C rates.

What could make this recovery happen faster? In terms of fleet dynamics, the most likely impact would be from temporary factors. Following the OPEC+ announcement in March, it isn’t likely that we will see an extreme oil surplus in the market in the near-term, and certainly not on the scale seen in 2020.

High oil prices are not conducive to floating storage, and so at present this source of tightening is unlikely. With the ongoing uncertainty around COVID-19 and the events of the last 12 months, we don’t rule it out though.

Geopolitical friction remains another potential driver of fleet restrictions. By its nature though this type of event is not going to be a sustainable source of upside.

Nonetheless the tanker market is arguably the most exposed shipping sector to geopolitical volatility, and this usually works in its favour. The recent blockage of the Suez canal has had a positive impact on spot rates, but its duration was short lived.

What about more sustainable sources of recovery on the demand side? Although our Base Case incorporates a positive view on oil demand recovery, we could see it rebound even faster. Given the sluggish start to 2021 that is unlikely to happen this year but 2022 offers more potential for out-performance. Such a scenario would require a lot to go right in the world’s ongoing battle against Covid-19.

Accelerating and widespread vaccination, sustained and strong protection against new variants, rapid recovery in air travel, and an explosion of pent-up travel demand unleashed with e.g. vaccination passports or similar, a mass return to working from ‘work’ etc would be among the waypoints required.

We can see jolt in oil demand next year with 2022 significantly exceeding 2019 levels.

The rapid change in the refining landscape could also herald more buoyant markets. This could come not just from import demand but changing trade patterns. Regional refinery contraction and expansion changes the balances of required crude and supplied products, driving global trade in both oil’s raw and refined forms.

For the world’s largest crude exporting region, the Middle East, more crude will be used in its expanding domestic refining facilities—reducing export potential, but significantly increasing products output.

Conversely, in the US, reduced refining capacity will potentially free up even more shale crude for export. This will add a further dimension to the ongoing contest between OPEC and US shale crude, which is likely to resume in earnest when we see a strong and sustained recovery in oil demand following the pandemic. ●