Dec 16, 2021
As tanker markets continue to endure the impact of the global pandemic and the recent omicron variant of the coronavirus, which offset expectations of a bullish fourth quarter, tanker owners anticipate changing trade lanes and increasing ton-mile demand could turn spot freight north after a year of breakeven-to-negative time charter equivalent earnings.
Nearing the end of 2021, Americas VLCC rates failed to capitalize on historically bullish winter seasonality supported by increased crude exports and a stronger refining landscape. Rates capped out at $5.6 million for the VLCC USGC-China run at the end of October, and have since fallen to a range of $4.6-$4.65 million during the first two decades in December. Comparatively, pre-pandemic fourth-quarter rates traded at an average of $8.15 million in 2018 and at $11.84 million in the geopolitically-driven 2019.
However, the return of global oil demand to pre-pandemic levels and the further return of OPEC+ crude barrels to the market could play into stronger VLCC freight out of the Americas into 2022, supported by US crude export dynamics.
Oil demand is expected to grow by 4.8 million b/d in 2022, which would leave it slightly above pre-pandemic levels of 100 million b/d, S&P Global Platts Analytics data showed. This number could be slow to rise heading into April and May 2022 but is expected to firm mid year, according to S&P Global Platts Analytics.
All eyes remain on Asian crude import markets, namely those of China, South Korea and India, to drive demand recovery and take responsibility for what Platts Analytics sees as 38% of total growth. Of that percentage, market participants expect to see higher utilization of USGC and Brazilian crude grades amid OPEC+ uncertainty and increased production out of the Americas. This trend would create an upswing in ton-mile demand as VLCCs make the longer-haul voyage to Asia versus the routes from the Arab Gulf to Asia and reposition to natural load areas.
On top of OPEC+ uncertainty, impending US Strategic Petroleum Reserve releases of 50 million barrels could push excess crude volumes onto the water if demand fundamentals remain supported. US exports have seen increases along with recent SPR releases, with most of those barrels headed to Asia, tanker owner Frontline said in its Q3 2021 earnings presentation. Rising US crude production also supports export opportunities, with Platts Analytics estimating a 1 million b/d increase in 2022.
On the petroleum product side, clean tanker owners are looking forward to projections of increased product demand in 2022. Seaborne refined product exports are estimated to increase 5.1% in 2022, according to Scorpio Tankers Q3 2021 earnings presentation citing Clarksons Shipping Intelligence data. Product ton-mile demand is expected to increase 5.5% in 2022 on the back of changing refining landscapes globally.
While refined product demand recovered in 2021, freight remained depressed for the first half of the year due to continued effects of the pandemic. Spot cargo supply out of the USGC remained low, with refined product stocks in the region well under five-year averages. USGC refinery production took a hit in the weeks after Hurricane Ida made landfall in Louisiana Aug. 29 and knocked 2.2 million b/d, or around 70% of the state’s refining capacity.
Spot flows from the USGC to South America’s east coast fell dramatically in March 2021 and have remained lower than levels observed in previous years. Shipowners said the region was sourcing products from an open arbitrage out of West Africa, where newbuild VLCCs and Suezmaxes were anchored with clean products and lightering onto smaller clean tankers.
With mid-2021 dirty tanker earnings in the negative, the clean trade for the newbuilds led to more profit. Imports from West Africa into EC South America peaked in June and July at 48% and 43% share compared to product flows from the USGC and UK/Continent regions, data from Platts cFlow trade-flow analytics software showed, but decreased to 7% in October and to under 20% in the fourth quarter, as dirty tanker earnings improved.
Looking at the coming year, the addition of over 1 million b/d of refining capacity in the Middle East through 2022 will grow ton-mile demand as refining capacity will close or convert to import terminals in mature markets. Poten and Partners data showed 1.26 million b/d of capacity in the US is due to close or convert, in addition to 1.24 million b/d in the rest of the world.
Refining capacity will instead concentrate in regional hubs including the Middle East, North Asia, India and Singapore, in addition to the traditional West of Suez refining centers. Already, the diesel arbitrage from the USGC to Northwest Europe has remained mostly closed since the end of 2018, according to Platts Analytics data. Spot flows have declined on the route in favor of exports to South America. The commissioning of Nigeria’s 650,000 b/d Dangote refinery, possibly in 2022, could provide a more permanent shift in diesel flows from WAF to Brazil.