BIMCO: After the party, the hangover is proving drawn out for oil tanker shipping
Tanker shipping was in many ways the odd one out of the shipping sectors in 2020; at the start of the pandemic, the market was strong, only to finish off the year in the doldrums, while the other sectors stayed profitable. Even a demand boost in December only managed to lift earnings slightly, raising the question of what it will take for tankers to return to profitability?
In the immediate aftermath of the pandemic being declared, tanker shipping appeared immune, but it too has suffered from lockdowns and travel restrictions. The US Energy Information Administration (EIA) estimates that global oil demand fell by 8.9% in 2020, from 101.2m barrels per day to 92.2m bpd. Though the drop in oil tanker shipping is slightly below this, demand for crude oil tanker shipping fell by 8.3% while oil product demand was down 5.2%. Measured in tonne miles, the fall in demand is slightly larger for both sectors: crude oil down by 9.2% and oil products by 6.3%.
The larger drops in tonne miles are in part due to Asia’s dominance and its importance when considering tonne miles, which in 2020 accounted for 63.6% of global crude oil imports and 36.8% of oil products. Asian imports of these fell by 60.9m tonnes (-5.1%) and 32.4m tonnes (-9.4%) respectively. In volume terms, the second largest falls in crude oil imports came from Europe and North America, where crude oil imports fell by 51.0m tonnes and 41.6m tonnes respectively. Outside Asia the largest drops in oil product imports came from North America (-8.8m tonnes) and Oceania (-6.7m tonnes).
“After the oil market boom, a bust was inevitable for oil tanker shipping as travel and economic activity was restricted, but the scale of the shock was unknown. Looking back, the overall damage to tanker shipping has not been as bad as the damage done to global oil demand,” says Peter Sand, BIMCO’s Chief Shipping Analyst.
“However, the stability of crude oil imports over the course of 2020 hide the realities that unfolded behind the scenes. As the oil price war broke out in March, the market was rushed with cargoes, leading to the peak in freight rates, a spike visible when looking at export data. However, the rush of cargoes caused severe delays due to logistical challenges, and the crude oil was therefore only discharged gradually, flattening out import data,” Sand says.
Timing crucial in determing oil tankers profitability in 2020
Though not exceeding the reported spike in crude oil tanker earnings in October 2019 (USD 307,888 per day on 11 October), the high earnings in March and April 2020 lasted longer, and many more ships were
The boom and bust of the oil price war
Holding the first two graphs in this analysis against each other, the stength of earnings in the second quarter appears to have come out of nowhere. Looking at the details however, provide a better explanation.
Mixed bag for oil product tankers
Just like demand for oil products was affected differently by the pandemic and following restrictions, so was demand for oil product tanker shipping. By far the largest drop comes from fuel oil imports, which
For profitability, another OPEC+ breakdown is needed
Global oil demand is expected to only recover slowly, with the EIA currently forecasting that on a quarterly basis, it will not return to Q4 2019 levels until Q3 2022. OPEC will contine to cut millions of barrels per day of production, and demand for tanker shipping is unlikely to experience another positive shock. This will leave earnings below breakeven levels unless the OPEC+ aliance breaks down again and once more finds itself pumping and exporting at will.
Furthermore, the lower oil price makes it harder for US crude oil producers relative to those in OPEC+ as the former have much higher production costs, meaning lower production and lower exports from North America. This is harming tonne mile demand in particular with regards to Far East imports. In 2019, total US crude oil exports grew by 52.5% in 2020 (source: US Census Bureau), giving them a substantially higher share of total global crude exports. However, with US production and thereby also exports, unlikely to maintain this pace of expansion, tanker shipping can no longer rely on the US to boost its tonne mile demand.
“Oil tankers are looking at a slow, uneven and unsteady recovery, as travel restrictions are once again tightened around the world, thanks to new virus mutations, even as vaccines are arriving left, right and center. In the longer term, the change in oil trade patterns is likely to have a negative effect, as the strong growth in US exports is unlikely to return as long as crude oil prices remain in their current range,” says Peter Sand.