Global tanker fleet struggles to break even

A The generational energy crisis has created the most difficult environment ever seen in which shipowners must make decisions about investing in tankers to transport energy products.

The global pandemic, closely followed by Russia’s invasion of Ukraine, is reshaping oil and gas supply and demand fundamentals amid record price and volatility. In China, a zero Covid policy is adding to global logistics bottlenecks, fueling inflation that has dampened a post-pandemic economic recovery.

The fleet of some 8,700 tankers and tankers (over 10,000 dwt) is caught between a rock and a hard place: the geopolitical agendas of domestic oil and gas producers and the decarbonisation targets of regulators for a shipping lane at zero emissions that transitions faster to greener marine fuels.

None of this is positive for rates and earnings. A New York investment bank covering the sector described oil tanker rates as “putrid” in February and forecast that seven of the eight listed oil companies it covered would post losses in 2022. further dashed expectations that the pace of oil demand growth will pick up and help raise prices for crude oil and product carriers to end an 18-month long decline in profits. Larger tankers are expected to earn below breakeven rates throughout the year until supply and demand fundamentals begin to improve in 2023 and 2024.

New York-based tanker consultancy McQuillings Services predicts 2022 profits for the 860-vessel fleet of super-large crude oil carriers at $11,000 a day, but only for tankers fitted with the newest scrubbers and more economical. Older tankers would earn $2,500 a day, well below daily operating costs of $9,800. About a third of VLCC’s fleet is fitted with scrubbers, allowing them to use cheaper, higher sulfur marine fuels. Better revenues are expected for small tankers. Although estimates of time charter equivalent rates exceed operating costs, they barely cover industry profitability levels.

The size of the new tanker construction order book, as well as the uncertain demand for crude oil and petroleum products in the near to medium term, underpin a bearish outlook. Verified orders for tankers over 10,000 dwt stand at 515 ships, or 55.6 million dwt, according to March figures from London-based shipbroker Braemar ACM. Of these, 185 have been ordered in the last 15 months. Most of the 300 new tankers (33.2 million dwt) scheduled for delivery this year were ordered before the pandemic, according to data from Braemar ACM. In 2023, fewer tankers will join the commercial fleet, a decrease of 20% measured in deadweight.

New build orders are slowing amid uncertainty about the International Maritime Organization’s decarbonization targets and how these could affect investment. Future carbon-free fuels are not yet commercially available, and fossil fuels like LNG have been challenged as a transition fuel. About 16% of tankers on order have some form of dual-fuel or alternative propulsion, using primarily LNG, or can be converted to be ready for ammonia or LNG. The result is an orderbook/tanker fleet ratio that would now be at its lowest in over 20 years. Newbuilds on order total around 6.5% of the commercial fleet of 873.8 million dwt, or around 8,700 tankers. The ratio is higher for large tankers and mid-range product carriers, the workhorse of the product carrier fleet.

Even if orders for new constructions resume, the delivery time is longer than expected. Shipowners have already filled available slots in Asian shipyards over the past 18 months with orders for container ships and other vessel types. Record freight rates for container ships that generated more than $110 billion in profits for container lines fueled the boom in the order book. Demand from liquefied natural gas carriers has also generated new orders, while an unexpected rebound in bulk carrier rates in 2021 has improved shipowner and investor confidence and led to an increase in orders.

Oil tankers, including pure chemical tankers, account for around 20% of the global shipbuilding order book by volume, according to data from the consultancy division of Lloyd’s List Intelligence. Container ships make up 12% and bulk carriers 22%, according to the data. While LNG carriers represent 3% of the total order book, the more than 160 ships on order represent the highest fleet to order book ratio of all segments, given that the existing fleet comprises some 670 ships.

Tanker supply is complicated by the high number of vintage vessels 20 years and older that have been deployed on US-sanctioned Venezuela and Iranian oil trade to China and Syria. More than 200 older tankers that would normally be scrapped participate in these parallel exchanges, taking around 3% of the overall market share. This not only distorted the age profile of the largest crude fleet, but inflated the number of fleets. Added to this complex supply picture is a series of placeholders that suggest other headwinds. This includes whether three-year-old Iranian or Venezuelan US sanctions on the oil and shipping sectors will be lifted, or whether new variants of Covid emerge to curb oil demand growth.

Already, the war in Ukraine is expected to reduce Russian exports of crude and products by 2.5 million barrels per day, or about 4% of global seaborne shipments. This removes 60% of all crude shipments from the country and 33% of diesel exports from the market, according to International Energy Agency estimates released in mid-March. Saudi Arabia and the United Arab Emirates, the only producers with spare capacity, refused to take over, leaving oil prices high.

The IEA warned in a monthly oil report in March that large-scale disruptions to Russian oil production threatened to create a global oil supply shock. The Paris-based agency has revised down oil demand estimates for 2022. Sanctions on Russia are adding pressure on energy prices and recalibrating trade flows of energy commodities. A US ban on Russian oil and petroleum products begins in April. The UK plans to halt all oil and gas imports by the end of the year and has banned Russian-linked vessels 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 exclude floating storage. Commodity traders chartered a record number of tankers for the storage of petroleum and petroleum products over a six-month period in 2020 in response to the demand shock that sent prices plunging. The situation has now reversed. The price difference – or gap – between the high spot prices of crude and refined products like jet fuel, diesel, gasoline and gasoil and the lower future price is so great that there is no incentive financial. 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.

In the medium term, the transition to green energy will also weigh on the demand for tankers, not just on new construction orders. The BP Energy Outlook, a widely regarded annual report on global energy, has largely static crude demand through 2025 until it begins to slow. This translates into stable maritime exports, leaving only the growth in ton-miles to provide opportunities to increase demand for the tanker fleet. Ton-miles are measured as volumes transported per distance traveled and are an approximation of vessel demand.
Source: Lloyd’s Register