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The Best Tanker Market This Century

The Stars Are Aligning for a Supercycle.

Shell published its Energy Security Scenarios report last week, which looks at the balance between energy security and the energy transition. In their Sky 2040 scenario which considers a faster transition to net zero, Shell expects demand for up to 10,000 liquefied hydrogen tankers, presumably to replace the 10,000 or so oil tankers currently on the water. 10,000 seems like a very big number when starting from one, which is the current number LH2 tankers afloat. To achieve Shell’s scenario, shipyards would have to start delivering nearly four hundred of these non-existent ships every year from 2025, alongside all the other ships on order. Purely from a shipbuilding perspective, this doesn’t seem like a very practicable scenario.

These ships would be transporting renewably-produced hydrogen made via electrolysis. Global electrolyser capacity would also need to increase by a factor of around one hundred from 2022’s level of 0.8 million tonnes to fill these tankers. Currently there is a bottleneck in electrolyser capacity. A scientist friend of mine is working on a cheap simple electrolyser design which can be built by any small engineering workshop with CADCAM design and manufacturing capability. Perhaps that will bear fruit one day, though the man-in-a-shed end of the R&D spectrum receives short shrift from the institutional and government funding, for the good reason that a fair percentage of men in sheds are not working on anything realistic. Still, to get to the kind of numbers Shell is talking about, the global economy is going to have to take a few punts on technology.

Meanwhile, today’s oil tanker owners have been refraining from ordering new vessels for several years now. Partly that was due to the horror-show freight markets which they have endured really since the 2015 peak which was caused by China building up its strategic petroleum reserve and hoovering up all the available (and cheap at that time) crude oil there was. The oil freight markets became markedly worse during the pandemic as global oil consumption fell by around 20 per cent. According to the IEA, global oil consumption may recover to 102 million barrels per day in 2023, which is still lower than in 2019. Perhaps, with the rise of electric vehicles, sustainable fuels, and so on, oil demand will never go higher than its pre-pandemic peak. In reality, it probably will, with different government and commercial forecasts spread between peaks of around 110 million barrels per day in 2030 to 130 million barrels per day in 2050 (very much a business as usual scenario there).

Partly tanker owners have not been ordering ships because of high prices. A USD 90 million VLCC newbuilding price in 2019 is now USD 120 million. Add some dual-fuel capability to that and you are quickly getting up towards USD 140 million. It’s a bit like the options list for a Ferrari. Yes, the base model is only USD 200,0000 but when you put on the options you really need, you are looking at USD 250,000. After several loss-making years, tanker owners are feeling the pinch and don’t feel like ordering ships without any guarantee of employment. Only Shell has supported newbuilding VLCC orders in the last two years, with a 2022, 10 ship order for LNG dual-fuel ships, via three ship owners, backed by long-term charters back to Shell.

The other major reason that tanker owners have not been ordering ships is because of uncertainty over the regulatory environment. Order a crude oil tanker today and it may deliver by Christmas 2025. It then has 25 years or so of a supposedly shrinking global oil market in which to operate. And during that time, it will have to cut its own emissions, sail around Maritime Protected Areas, reduce its noise pollution, possibly capture its own CO2, or be retrofitted with alternative fuel technology….the potential for never-ending capital spend is significant.

As a consequence of this reluctance to shop, tanker owners are presiding over a fleet which is no longer growing. According to S&P Maritime (the old Fairplay database), the global oil tanker ordrebook is only 199 vessels. There have been 14 newbuilding orders placed this year, mostly for Aframax sized vessels, presumably LR2 ships, with traditional Greek ship owners leading the way. All these ships will deliver in 2025 bar one small, sub-10k dwt vessel which will be launched in 2024.

In 2022, only 56 new tankers were ordered and in 2021 only 65 new tankers were ordered. Both those years were thought to have been affected by the pandemic, which stopped owners and shipyards from travelling to meet each other. It’s too early to say what the total number of orders this year will be, but annualising the 14 ordered in Q1 brings us only to 56 ships.

At the same time, oil tankers have a mandatory life of 25 years. This Logan's Run effect stems from a convention brought in after several older tankers broke up in the first decade of this century, causing oil spills and environmental damage. There are hundreds of oil tankers built before 2000 on the water today which will turn 25 before all the current orderbook delivers. The number includes 17 VLCCs, 16 Suezmaxes and 25 uncoated (i.e. crude oil carrying) Aframaxes, versus 17 VLCCs on order, 16 Suezmaxes and 31 Aframaxes. The net fleet growth for crude oil tankers before 2026 is practically zero.

This small orderbook phenomenon has occurred simultaneously with the global disruption to oil markets caused by Russia’s invasion of Ukraine. Russian oil increasingly goes East to India and China. In March, Russia was China’s biggest crude oil supplier, surpassing Saudi Arabia for the first time. Asian refineries produce transport fuels from this crude and then ship it back into Europe where consumers can drive, fly and sail about with clear consciences. The effect on tonne-miles has been electric. Some brokers are suggesting a six per cent increase in crude oil tonne mile demand this year. Already, the total volume of oil on the water (being transported or stored on ships) exceeds the five year range and the total since 2016. Thanks to E. Finlay-Richardson for bringing this chart to my attention.

As is well known, this situation has led to a number of - usually older - tankers being used to transport so-called sanctioned oil. This shady business is extremely profitable. According to one regional broker, the daily hire cost for an Aframax shipping Urals crude out of Novorossiysk into the Mediterranean for ship-to-ship transfer is over USD 180,000. Those who count the number of vessels going into the ‘dark fleet’ suggest that between 10% and 20% of ships are involved. This reduces the ‘legitimate’ fleet that is available for ‘legitimate’ trade.

The dash for tonnage has lit a fire under oil tanker freight markets. In 2022, VLCCs were earning next to nothing – in fact, making negative returns for the first half of the year according to the Baltic Exchange’s formula for converting world scale into a dollar-per-day number. This year, that Baltic formula suggests that VLCCs are earning around USD 32,000 year-to-date but more like USD 67,000 in March. For modern, eco-engined ships with sulphur scrubbing funnels which can burn cheaper, lower-spec fuel oil, daily hire rates may have exceeded USD 100,000 a day in March. Smaller Suezmax and Aframax ships are earning around USD 75,000 a day and USD 65,000 a day year to date – counting only the ‘legitimate’ trades as the Baltic Exchange has stopped reporting ex-Russia freight rates.

The upshot of this is that the Baltic Dirty Tanker Index is well ahead of any of the previous six years and is tracking its regular seasonal path nicely. Furthermore, with fleet growth constrained by a record small orderbook, it cannot grow to meet any increase in demand in legitimate trade. It will be difficult for ships that have gone over to the dark side (as it were) to come back if demand does rise. Meanwhile oil prices have fallen to multi-year lows due to macro-economic worries around banks and interest rates. That may encourage more oil trade in the short term as prices are likely to recover with market sentiment.

Baltic Dirty Tanker Index Monthly Averages and Seasonal Pattern

Regular readers of my reports will know that I am not prone to hyperbole. This time however it feels like the stars are aligning for a tanker market supercycle. Tonne mile demand up, disruption becoming indefinite trade changes, and a tiny orderbook. It all adds up to the best market this century, beating even the 2005-08 boom which was ended by the 2008 crash coinciding with the start of a wave of double-hull newbuildings built to beat the 2010 single hull phase out. This time, at least for the next few years while shipyards are full, even the regulations are working in the freight market’s favour. Even if Shell’s fast transition scenario plays out and oil demand falls as renewable hydrogen is brought rapidly to market, then the oil tanker freight market is going go out not with a whimper but a bang.

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