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Tanker Market Drivers, Issues and Outlook For The Major Tanker Sectors – VLCC, Suez, Afra, Pmx & MR. October 2012. Jerry Lichtblau True North Chartering. Jerry Lichtblau. jnl@truenorthchartering.com. 203-202-7490. Broad Theme.
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Tanker MarketDrivers, Issues and Outlook For The Major Tanker Sectors –VLCC, Suez, Afra, Pmx & MR October 2012 Jerry Lichtblau True North Chartering Jerry Lichtblau jnl@truenorthchartering.com 203-202-7490
Broad Theme • Impact of evolving oil demand has been joined by changing logistics of crude supply to negatively impact tanker demand. • Increased tanker supply and shorter voyages from source to destination of primary areas of demand growth have … • Combined with increased crude production from historic centers of demand that remain critical for tankers due to nominal volume of oil consumed to weaken earnings • Growth of crude supply has exceeded oil demand during 2012 • Aided tanker rates pre-summer 2012; impact of Iranian sanctions and softer Chinese demand have helped thwart any kind of post-summer recovery – are among primary issues to monitor going forward • U.S. “new crude”, in particular, not necessarily crude of choice – displacing some crudes while increasing demand for others • Increased attention to crude specifications as historic trade patterns impacted • Evolving demand/production has impacted product as well as crude trades
Supply Picture • Past growth has been centered in Suez & Afra sectors • This year growth will be significant and/or increase its pace for VL’s& Suez, while moderating for Aframaxes • VL’s – 2012/’13 – 106 deliveries -- 62 in 2012 & 44 in 2013 • Suez – 2012/’13 – 117 deliveries -- 63 in 2012 & 54 in 2013 • Afra – 2012/’13 – 83 deliveries -- 54 in 2012 & 26 in 2013 • Proj. approximately 25 scrapping/removals for both VL’s and Sz in 2012 • Proj. approximately 45 scrapping/removals of Afra’s in 2012 • Thru September 7 VL’s, 19 Sz and 27 Afra’s have been scrapped • Historically VL’s have large # of “other removals” – 20 in 2011 vs. 12 scrap
Supply Picture Con’t • Growth for the Panamax sector anticipated to continue to be moderate • MR sector growth to flatten after 50% supply growth during the ‘06/’12 period • Pmx – 2012/’13 – 40 deliveries -- 22 in 2012 & 18 in 2013 • MR – 2012/’13 – 156 deliveries -- 80 in 2012 & 76 in 2013 • Proj. approximately 12 scrapping/removals for Panamax in 2012 • Proj. approximately 40 scrapping/removals of MR’s in 2012 • In 2011 there were 12 Panamaxes and 35 MR’s ≥ 35k dwt scrapped/removed
VLCC Environment • Shift in demand from US/Europe to China/India has augmented the impact of supply growth since end 2007 by over 75% • This was dampened during the 1st half of 2012 by increased WAF/East volumes and increased AG/USG due to Motiva ramp-up & increased U.S. light sweet production – • Both moderated during the 1st part of summer – WAF/East volume returned during September, but … • Seasonal reduction of AG exports Q3 – for regional power generation outweighed impact of increased WAF/East activity for September cargoes • Potential for a near-term Iranianexportsincrease (state backed cargo insurance)to augment increased Q4 oil supply thisyr, but not near 100% • Very soft Q3 market experienced the last two years may become more pronounced in coming years if regional demand for power requires increased volumes of direct run crude
VLCC EnvironmentContinued • 2013/2014 to be further impacted by: • Previously noted tanker supply issues - increased deliveries in 2012 and 2013 – >100+ vessels (or 18%+ Jan ‘12 fleet) scheduled between both years 2% ≥ 20 years, near 15% ≥ 15 years • Increased ESPO volumes likely to impact Chinese VL usage – slowly at first as export ramp-up likely to be gradual – but a source for increased Afra demand – slides 19 & 20 for further detail • Above to be countered by increased AG/USG volumes once Motiva addition back on-line as well as incrementally higher imports due to increased indigenous light sweet crude requiring increased heavy sour volumes to meet target slate in USG – approx. avg API of about 27.3 and sulfur of 1.9% -- Timing to be key regarding Q1 seasonal strength
Oil Demand Impact on Tanker Market Since Financial Crisis ∆ VL Supply • Shift in demand from US/Europe to China/India have essentially balanced each other nominally, but have augmented the impact of moderate VL supply growth since end 2007 by 75%+ as previously noted – supply growth had been moderate until 2012, but tanker demand hurt by changing geography of oil demand …
Oil Demand Impact on Tanker Market Since Financial Crisis ∆ Oil Demand • Globally – demand grew by about 2.7 mm bpd from 2007 through the end of 2011 and YTD 9/12 has added an additional 0.9 mm bpd • U.S., Europe, China and India -- four focal protagonists split East and West of Suez have nearly balanced each other nominally – the rest of the world “in-effect” providing the growth in oil demand, both occurring to the detriment of long-haul trades …
Chronology of Evolving Oil Demand’s Impact on VL Sector A decline in VL demand of 70 – 80 tankers since the end of 2007
Easing Chinese Demand Easing Chinese Crude imports – point to softening demand • Indications are September imports/demand have improved, will need additional data points to determine if this is a revival
2012 WAF/East Volumes • WAF/East activity coincided with a firm market • September was obvious exception – lower AG volumes in 3rd qtr dominate market • Angola has been beneficiary of incremental growth • Future of increased 2012 volume is a question, as Sudan output returns • Continuing reduction to U.S. demand for imports of light/sweet crude imply that if Sudan bumps Angolan exports to China - There will likely be another surprise/revision to trade patterns as the Angolan crude will need a destination, government budgets should resist reductions to actual output regardless of quotas
U.S. AG Sourcing Vs. North Dakota Bakken Production • Increased light/sweet crude production has coincided with increased AG imports. • Hiatus likely in coming reporting months, but will return with Motiva expansion • 2015+ AG sourced crude will increasingly be competing with Western Canadian sourced crude – planned pipelines will be able to deliver larger volumes of this crude to USG region • Additionally – will need to monitor plans for refineries basis crude slates – in order to run shale oil efficiently significant investment required – Flint Hills refinery recently announced it will spend $250 mm to better run shale oil
U.S. AG Sourcing Vs. North Dakota Bakken Production – Con’t Sulfur content of USG has generally increased and the crude has gotten heavier as Bakken production has grown – The July drop in avg. API is tied to the decline in Iraqi imports whose API average for U.S. crude imports is about 30.5
Reduced Q 3 Flows From AG Expected to Recover • AG direct crude-burn increases seasonally – a reduction in this usage and the bullet below point to increased AG crude supply in Q4 • Japan and India have worked out state-backed supplementary cargo insurance schemes and Korea expects to increase imports going forward Source: Citibank Commodity Research Source: Citibank Commodity Research
Suez Environment • Correlated to VLCC’s due to substitution issues, WAF market – particularly Sz East movements and to a lesser extent AG volumes • Concerns regarding USAC refinery closures have been both alleviated and re-born although the issues driving the re-birth are not a surprise • 2 of 3 refineries to remain open, but alternative crude sourcing to temper support for sector • Reduced U.S. crude imports has led to sector owners seeking/finding increased diversity in demand, particularly in Caribbean, but … • 2013 developments in Russian logistics likely to counter this to some degree and weigh on sector demand • Increased Kozmino and Baltic (Ust-Luga) volumes expected to reduce Black Sea exports which utilize Suez tonnage • Sudan production shut-in aided WAF/East market during ’12, but pending 2013 return raises issues regarding level of Chinese imports from WAF in coming year – to impact both Suez and VL sectors
Bakken Production Vs. U.S. Nigerian Imports • Bakken, Eagle Ford, Permian Basin & other shale oil pushed Nigerian crude out of USG – USAC imports from WAF nation to face similar competition • USAC refineries usage of rail delivery of Bakken crude to compete with mainstay of Suez delivery • PBF to have as much as 140k bpd of rail delivery capability at its Delaware City facility • Among planned investments at Philadelphia refinery by new owners is a high speed rail unloading facility at the refinery
Total Chinese Crude Imports & From Angola Specifically • Chinese imports from Angola soared when strife between Sudan and South Sudan effectively removed Sudan as a reliable source of crude – with agreement with the “South” Sudan production expected to return in 2013 • Chinese imports came off in total & from WAF during Q3 as AG exports declined – expect Q4 increase as AG & global supply increase
Suez Supply • Largest amount of scheduled NB’s of crude carrier both in number and percentage of fleet at 117 – over 25% of Jan ‘12 fleet • 8% of beginning of 2012 fleet is ≥ 20 years of age and about 18% is ≥ 15 years of age • Scrapping through mid-year about 3% of beginning year fleet • Reality may be a little less onerous as over 40% of the scheduled 2013 NB’s are from China and may be delayed based upon recent history • Approximately 25% of total 2012/2013 scheduled deliveries are being built in China – majority from the Rongsheng yard
Aframax Environment • After years of supply pressure that had seen the fleet size grow by about 50% from 2004 to the beginning of this year, supply pressure has begun to alleviate – growth rate expected to subside this year and 2013 scheduled deliveries are less than half that for 2012 • This will coincide with increased demand as Russian export logistics undergoes significant changes • Kozmino volumes to expand – initially believed to about 425k bpd; increased Baltic volumes is a trend that is already visible • 600k bpd Kozmino exports was original plan, but recent reports indicate current East Siberian production is less than was expected – view is that productionwillstepupgoingforward600k will happen (will be 25 cargoes/mth) • Two-tier market potential due to 100k MT Russian stems and relatively small portion of fleet ≥ 110k Dwt • Anticipation of increased VLCC volumes to USG will aid regional Aframax market that has suffered since Venezuelan exports to the U.S. have declined
Historical Russian Logistics & Aframax Fleet Profile • 110k+ Dwt portion of fleet is less than 30%, but was utilized for nearly 60% of 2012 Baltic volume* * As per TNC and Lloyds data
Aframax Supply • 2012 scheduled deliveries are similar to 2011 amount but 2013 scheduled deliveries decline by over 55% • Scrapping through August has exceeded the 2011 total • 9% of beginning of 2012 fleet is ≥ 20 years of age and about 19% is ≥ 15 years of age • For all three sectors, 2014 and beyond orderbook is negligible – the combination of earnings and yard prices have dissuaded ordering thus far, but if yard prices are reduced during 2013 the market could be surprised • A non-fundamental issue to monitor going forward is the EU implementation of regulations regarding carbon taxes that will set limits on shipping as well as other industries – this could provide incentive to order newer more fuel efficient vessels for all sectors – may become an incentive regarding vessel ordering.
Panamax Environment • Softening Atlantic Basin fundamentals • Core demand provided by residual/fuel oil under attack on both sides of the Atlantic • European environmental pressures felt most severely on dirtiest crude products • U.S. • Inventories – most of 2012 below 5-yr range • Demand – 4 week rolling avg. below 5-yr range for most of 2012 • Production – 4 week rolling avg. lower end of 5-yr range through 2012 • Imports – total imports below 5 yr range 5 of 7 months and below or bottom of range for 6 of 7 months on the USAC • Exports – middle or upper end of 5 yr range most of 2012 • However, flexibility has made this the “Traders Sector” – increased opaqueness of the spot market vs. similar sectors has aided earnings • Increasing utilization, particularly in Europe for the transport of clean products
U.S. Residual Fuel PictureImports & Exports Other Info USG imports not pictured totaled 105k bpd in 2008 YTD 7/12 They are 43k bpd
MR Environment – Atlantic Basin • Demand began year as a three-legged entity, but has transitioned to having a dominate single leg • European, Caribbean and U.S. sourced cargoes all provided or were perceived as providing substantial cargo volume … • Closing/idling of Caribbean refineries and decline of European capacity/production … • Bankruptcy of Petroplus followed 3 other earlier European refineries closings removing near 1 mm bpd of capacity • Market has risen and fallen based upon ability of U.S. export market to absorb tonnage • 2013 expected to experience 200k+ increase in Caribbean refinery capacity – approximately half of additions in Colombia -- exports vs. indigenous consumption will impact market • Return of operation of Aruba or its sale &/or increased European refinery utilization levels could provide positive surprise for 2013 market
U.S. Product Exports Increasing Dominance of Caribs • YTD U.S. product exports continue to firm, but Caribbean sourced volumes have declined • U.S. sourced cargoes have more than doubled Q1 ‘11 to Q3 ’12 • Total regional declined early 2012 following refinery closures, but Q3 activity is within 5-7% of peak 2011 levels – however, tanker supply has become concentrated
U.S. Product Export Development • Total product exports have more than doubled since 2007 • Diesel exports have risen over four-fold YTD 7/12 vs. YTD 7/07
Preliminary 2013/’14 Outlook • Timing of Motiva ramp-up will be critical for VL sector earning in 2013 due to its potential impact on seasonally strong Q1 results and … • Due to correlation of 2 sectors this will also shape Q1 for Suez sector • Iranian sanctions could cap recovery of VL demand from AG • 2 wildcards to monitor … • If U.S. allows for limited export of shale crude as a sort of “quality swap” or similar scheme – it would increase tanker demand & the global supply/demand imbalance – will traditional producers need to reduce supply? • Routes utilized in Aframax outlook do not fully reflect changing Russian logistics, market to be stronger than index below – increased Baltic rates to aid North Sea market, but reduced Black Sea volumes expected to result in softer X-Med earnings • Longer term, the geography of new oil supply will shape the oil movement and thereby the tanker market • The issues tied to U.S. product exports/pricing, reduced U.S. distillate yields may shape the “options available” for shale oil
Preliminary 2013/’14 OutlookAm Early Earnings View • Earnings on left do not reflect impact of slow steaming during last 2 yrs and for 2013/’14 • Approx. impact of • $4-$5k aid to VL’s • $3.5-$4.5k for Suez • $0.5 - $1.5k for Afra and smaller dwt sectors • Post 2014 wider Panama Canal will impact crude and clean trades as Aframax & Suezmax tonnage will have easier USWC & Asian access