Which way is the crude oil tanker market heading?
Entering 2016, the crude oil tanker market gave a strong performance. Throughout 2015 it gained significant momentum due to lower oil prices which drove demand, with time charter equivalent (TCE) rates reaching their highest level since the start of the 2008 financial crisis. Yet this also placed the market into a vulnerable position; any decline in demand could mean a large amount of instability, and a huge drop in rates.
2016 was expected to be yet another profitable year for the oil tanker industry, but following the seasonal hike at the start of the year, freight rates began a steady decline. Asian VLCC rates dropped by 44% in January 2016, while VLCC day rates for Saudi Arabia-Japan fell nearly 50%. This decline was primarily caused by competition between owners who were reluctant to wait lengthy periods for vessels heading to the Middle East. Abundant vessel supply, congestion at ports and a host of brand new ships all contributed to this increased competition.
Throughout 2015 low oil prices encouraged countries, especially China, to import larger quantities of oil to stockpile for future use, and this continued into 2016. Once this stockpiling ends, however, and refiners start to utilise their inventories, tanker demand will take a further hit. In the last few months, the oil supply has been very flat and much lower than levels last year. As a result, tanker rates have begun to fall once more, and in August 2016 crude oil tanker rates reached one of their lowest levels in many years. High product inventories, a result of the booming trade in 2015, have caused discouragement regarding putting more crude oil into refineries.
There is some positivity, however, as we approach 2017. The EIA (U.S. Energy Information Administration) have forecast that, while the total world’s oil production has fallen in 2016, it is set to rise again in 2017 which could hugely benefit the crude oil tanker market. Similarly, refinery margins have also begun to show slight improvement in Asia which also bodes well for the tanker industry; as refining margins improve, refineries are encouraged to increase utilization and import further crude oil.
China’s oil consumption is related to its economic activity - a major factor that drives crude oil demand. This is particularly true of the Chinese automobile industry which is a major petrol consumer. Since the Chinese government cut taxes on small engine automobiles in October 2015, sales have continued to rise. With the tax cut set to expire at the end of the year, consumers have been prompted to increase their purchases which is an encouraging factor for the crude oil tanker industry.
While the crude oil tanker market has dipped at the end of 2016, there is increasing optimism that 2017 might see it rise once more. Providing the Chinese economy continues to rise, oil prices remain relatively low and the supply of oil increases (instead of decreases) then 2017 could be a very positive year for the crude oil tanker market.