Shipowner: Strong demand for oil tankers expected in the second half of this year

Driven by seasonal and positive supply-demand fundamentals in the winter market, spot market prices for crude oil tankers rose sharply in the fourth quarter of 2018.

Teekay Tankers recently projected that the tanker market may face some pressure in the first half of this year, but from the second half onwards to 2020, multiple positive factors will make the crude oil tanker demand fundamentals stronger.

Teekay Tankers stated that in the fourth quarter of 2018, OPEC crude oil production increased to 32.4 million barrels per day, the highest level since July 2017, up from 31.4 million barrels per day at the beginning of 2018. Most of this increase came from the Middle East, with higher production offsetting declines in Venezuelan and Iranian production. By the end of 2018, Russian oil production reached a record 11.5 million barrels per day, which was beneficial for medium-sized tanker demand in the Mediterranean, Black Sea, and Baltic regions.

“Increased US exports also supported tanker demand, with US crude oil production reaching a record 11.7 million barrels per day, and crude oil exports reaching 2.5 million barrels per day in the fourth quarter of 2018. This was beneficial for both crude oil tanker demand and Gulf tanker demand,” said Teekay Tankers.

Spot market prices for crude oil tankers have softened in the first quarter of 2019, which is a typical time for refineries to enter the seasonal period.

OPEC's production cuts also put pressure on crude oil tanker demand, with OPEC (plus selected non-OPEC partner organizations) pledging to cut production by 1.2 million barrels per day starting in January 2019. Early data shows high OPEC compliance with the cut consensus, with recent crude oil tanker demand being negative.

Venezuelan crude oil production may also decline in the near term due to impending US sanctions, but this may be offset by longer voyages as Venezuela seeks to sell oil to other markets, such as Asia.

Teekay Tankers expects OPEC production cuts to negatively impact tanker demand in the first half of 2019; however, looking ahead to the first half of 2019, due to a well-balanced oil market supply and demand, OPEC believes that oil demand will increase significantly, and simultaneously increase production to drive crude oil tanker demand growth.

Global tanker fleet capacity increased by only 5.7 million deadweight tons, or 1%, in 2018, the lowest tanker fleet growth rate since 2001. High scrapping levels were the main reason for the low fleet growth rate in 2018, with a total of 22.4 million deadweight tons scrapped, the fifth highest scrapping year on record.

Looking ahead, Teekay Tankers expects tanker fleet growth to increase in 2019, as a firmer freight environment should lead to lower levels of scrapping. The company expects overall tanker fleet growth of 3.5% in 2019, with most of the growth in the first half of 2019.

Teekay Tankers expects this to further increase pressure on the tanker market in early 2019; however, global tanker fleet growth is expected to decline significantly in the second half of 2019 and 2020, with growth of less than 2%.

Global oil demand remains robust, with an expected increase of 1.4 million barrels per day in 2019 (average forecast from the International Energy Agency, Environmental Impact Assessment, and OPEC). In addition, Teekay Tankers expects tanker demand to be boosted in 2019 due to increased global refining capacity.

According to the International Energy Agency, total refinery additions in 2019 will reach 2.6 million barrels per day, the largest annual increase ever. This should benefit both crude oil and product tanker market demand. Teekay Tankers also expects the new IMO 2020 regulations to have a positive impact on tanker demand, as this may lead to increased refinery output.

New environmental regulations could also open up new trading patterns and arbitrage opportunities for crude oil and product tankers, which would benefit the overall increase in ton-mile demand. Finally, new pipeline capacity on the US Gulf Coast is expected to lead to an increase in US crude oil exports from the current 2.5 million barrels per day to approximately 4 million barrels per day in the second half of 2019, which is expected to help increase crude oil tanker demand and US Gulf demand.

In summary, Teekay Tankers believes that OPEC production cuts, fleet growth, and seasonal refinery impacts may put pressure on tanker demand in the first half of 2019.

However, the impact of positive factors such as increased US crude oil exports, the return of OPEC crude oil supply, reduced tanker fleet growth, and IMO 2020 regulations will lead to stronger crude oil tanker demand fundamentals in the second half of 2019 and 2020.