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Tanker sector looks beyond hurricane season to firmer Q4 fundamentals

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Some very physical disruption is causing short-term volatility in Atlantic markets but the recent rally is supported by stronger fundamentals 

London, 19 October, 2017. An unusually high level of disruption from the hurricane season in the Caribbean and Gulf of Mexico has shaken up the tanker market, with turbulence impacting the spot market while timecharter rates remained stable, reflecting weak fundamentals.

However, beyond the headlines there have been some important and constructive shifts in the market which are positive for future conditions.

Oil demand growth has been out-performing expectations, with the IEA’s most recent estimate for global growth this year at 1.7%, supported by a very strong Q2. Q4 is looking healthy for demand and will see a major increase in refining activity which drives our expectations of increasing spot rates across the market. Although MSI sees only limited upside for T/C rates, positive fundamentals are likely skewing the risks to the forecast to the upside.

“Contributing to the improving platform for the tanker market have been two key features of the second half of 2017: global oil stocks are being drawn down and scrapping is increasing,” says MSI Director for Oil and Tanker Markets, Tim Smith. Although not supportive for immediate trade volumes – because stock draws will displace imports – a rebalancing of the oil market is clearly required to generate long-term trade growth – it is a necessary hurdle to pass.”

Reduced floating storage also means more tonnage returning to the market. OPEC estimates a 40 million barrel drop in floating storage since the start of 2017. Compliance with OPEC output quotas has been lapsing, but nonetheless has contributed to the rebalancing.

Whether the cartel decides to extend and/or deepen cuts at the end of March 2018 remains to be seen but the MSI expectation is closer to an extension rather than another substantial cut.

The second major driver to the improvement – scrapping volumes – have shifted up a gear to the point where sizeable amounts of tonnage are being removed from the market. The impact of recent activity will be limited but should this trend continue – and MSI expects that it will – it will be supportive for earnings.

As a result, MSI forecasts that at the end of Q4, a seasonal pick up in refining and demand will see average spot rates on the key TD3 route will rise to $34,300/day and support the increase in T/C rates to around the $26-$27,000 /day mark. At this stage though we are not expecting major support in Q1 18, unless we see a sustained surge in global demand growth.

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