Tanker market drivers issues and outlook for the major tanker sectors vlcc suez afra pmx mr
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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. [email protected] 203-202-7490. Broad Theme.

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October 2012

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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

[email protected]

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 PictureStocks, Demand & Production


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


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