The Drivers in the Product Tanker Market

The drivers in the product tanker market

Erik Ranheim
Manager Research and Project Section
INTERTANKO Phone: +47 22122675
P.O. Box 5804 Majorstua Fax: +47 22122641
0308 Oslo, Norway Mobile: +47 92057248
Bogstadveien 27B
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The factors influencing the product tanker market are:

· The world economy and oil demand

· Product imbalances

· Refinery developments

· Arbitrage trade – taking advantage of different product mix, seasonal variations and temporary situations such as maintenance

· Changing product specifications/Reclassification of Annex II products

· Tanker supply

In its latest prognosis the International Monetary Fund (IMF) forecasts the world economy will grow by 4.9% this year and 4.7% in 2007. The increase in world oil demand varies greatly from year to year, to a great extent in line with the world economy. However, the high oil price appears to have at least some effect on oil demand. Some believe that the oil price will remain high over the next few years. The high oil price does not appear to have affected the world economy significantly so far, but it could be affecting oil consumption.

There are three main areas of concern that could have a marked impact on the energy market. Firstly, meeting the majority of your vital energy demand from areas with unpredictable political regimes makes you vulnerable. Secondly, there is a growing indication that the greenhouse-effect is real, including the warming of the oceans resulting in a large number of strong damaging hurricanes. Thirdly, a large import bill can strongly affect the production costs for many industries as well as a country's balance of trade.

There are several initiatives being taken around the world to limit oil consumption and import dependency. Brazil is using an increasing amount of ethanol, Sweden bio-fuels, Japan is investing in gas to liquid projects, in the U.S. there is a waiting list to buy hybrid cars, in other places gas is being used as fuel, and in Finland they are investing in new nuclear plants as an environmentally friendly option.

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World oil demand has over the last 10 years or so varied between a 0.8% increase in 2002 to 3.8% in 2004 - an average of 1.8% since 1994. The biggest and most important growth areas for the tanker industry have been China and the U.S. The projection for 2005 is also 1.8%. Continued high oil prices may mean a lower growth in world oil demand.

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The product imbalances in the world are expected to worsen because no new refineries are planned in the U.S. and the diesel deficit in Europe is expected to increase with more demand for diesel cars, and little change in European diesel production over the next few years. The tight refinery capacity also gives rise to temporary imbalances due to refinery maintenance or seasonal variations.

However, as from 2008 the situation is set to change as there are many new refinery projects and some large ones may come on stream in India and Middle East as from 2008. This will to a great extent be export capacity. There are 26 product tankers above 80,000 dwt on order indicating that more long haul product trade is expected. However, some 80% of product tanker tonnage on order is between 40,000-80,000 dwt. If the U.S. should take more product tankers from the Persian Gulf, this would create a great demand for product tankers. For example, the transport of half-a-million barrels per day from the Persian Gulf to the U.S. Gulf would require some 60 product tankers, about the same amount as if the products were taken from the Jamnagar refinery in India.

U.S. gasoline imports were up by more that 12% until mid April in 2006 compared to the same period in 2005. The increase in imports in 2005 over the same period was some 7%. Imports in the week ending 21 April this year were as high as 1.338 mbd. Only during the three weeks 30 September to 14 October 2005 after the hurricanes Katrina and Rita has a higher level been recorded - 1.465 mbd.

The U.S. was in the last week of April entering the period which usually sees the highest gasoline imports. The imports for the four-week period starting the last week in April have on average since 1996 been more than 13% higher than for the whole year. Gasoline import until mid August has historically been higher than the average for the year. U.S. gasoline stocks as of 21 April were, according to the U.S. Department of Energy / Energy Information Administration (DOE/EIA), some 5% lower than on the same date in 2005. However, this may mainly be due to the U.S. switching from methyl tertiary butyl ether (MTBE) reformulated gasoline (RFG) to ethanol RFG.Terminals have been reducing their inventories of finished RFG, which is most likely winter grade gasoline, in order to make room for reformulated blendstock for oxygenate blending (RBOB) with alcohol. As the anticipated phase-out of MTBE progresses, finished RFG inventories are expected to virtually disappear.When MTBE was blended into the gasoline at the refinery level and then shipped via pipeline, it was included in both finished and total gasoline inventories because it was already co-mingled with the gasoline. However, when ethanol is to be blended with RBOB, only the RBOB is included in total gasoline inventories, while the ethanol is included in the “other oils” category. This places the apparently low gasoline stocks in a different light

The U.S. has managed to increase capacity in current refineries virtually every year, except in 2005 when a half-a-million barrels per day were shut down due to damage from the hurricanes Katrina and Rita. With increased world refinery capacity, in particular as from 2008, the U.S. may import more products for example from the Middle East or India.

Today there is a multitude of new refinery projects being launched, and it is unclear which are plans awaiting final decisions and which are concrete projects.

Petroleum Intelligence Weekly reports that new expansions will turn India into a global refining hub as they exceed the projections for domestic demand growth. Some 1.6 million barrels per day (mbd) of new capacity is due to come on stream by 2010 at a cost of around USD 12 billion, putting out products that meet the tightening fuel specifications in the U.S. and Europe, which are among the potential export markets.

Saudi Aramco's domestic and global refining expansion will take its gross refining capacity from 3.9 mbd to 6 mbd by 2011.

In South Korea S-Oil’s board approved a USD 3.7 billion project to build a 0.480 mbd refinery, a project which includes two secondary units: a 75,000 b/d residue fluid catalytic cracker to process fuel oil into gasoline and a 75,000 b/d hydrocracker for processing fuel oil into diesel and kerosene.

The limited refinery capacity coming on stream before 2010 may in itself keep product prices high and limit the increase in oil consumption. However, tight refinery capacity and little slack in the product supply chain will in itself mean increased product trades as maintenances and seasonal variations will increase the need to import products.

Whereas European crude oil imports have remained rather steady, product imports have increased from 4.5 mbd in 1999 to 6.3 mbd in January 2006. Europe takes products from a number of areas - mainly intra European trade. Some 17% (1.1 mbd) of the product imports in January were taken from the Former Soviet Union, about 9% from OPEC countries, and some 5% from the United States.

With declining North Sea production and slower growth in the FSU, Europe may in future take more oil from West Africa and the Middle East. With the lack of diesel production capacity and an increasing share of diesel cars, increased diesel imports could also be expected.

The arbitrage trade is virtually impossible to predict as it depends on a mix of refinery maintenance, seasonal variations, refiners and trades occasionally taking advantage of price differences, and temporary refinery shut downs.

Largest charterers

The following information is based on reported fixtures and does not include oil company controlled tonnage, contracts of affreightment and/or spot fixtures. We hear from one broker that only about half the fixtures are reported.

There were 1,487 panamax spot fixtures in 2005, of which 938 were dirty. The ten leading charterers of the 549 clean spot fixtures are shown below. Collectively, these charterers also accounted for 43% of all panamax clean spot fixtures in 2005.

298 of the 549 panamax fixtures, or 54%, were AG liftings, 51 of which were to northern Europe with most of the remainder to Japan and other Asian destinations. The next largest movement is 74 fixtures between the UKC and the U.S., again in response to growing U.S. imports. Some 70% of panamaxes on order are coated indicating that the past employment trade of fuel oil and other dirty cargoes may not be where future employment lies.

There were 1,087 clean spot fixtures in 2005 involving small product carriers. Below are the top ten charterers, with Shell taking the lead.

These ships trade mostly intra-regional such as in the Mediterranean, which is the largest single source of employment.

Of the total of 3,028 spot fixtures involving handymaxes, 2,661 were clean. The top ten charterers of clean handymax fixtures accounted for 43% of all fixtures. The reported contracts do, however, only represent a part of the market, as many tankers are on contracts of affreightment, period contracts, in oil company fleets, or not reported. (Source: Poten & Partners)

The United States dominates handymax employment with 432 fixtures between the UKC and the U.S, and 414 fixtures between the Caribbean and the U.S. accounting for nearly a third of all fixtures. The next largest category is intra-Asia, which accounts for 641 or nearly one quarter of all fixtures.

Product Tanker Supply 10,000- 59,999 dwt

The product tanker supply for the next couple of years is more or less decided by deliveries and phase out. The situation varies according to the segment, but some 18 dwt is due for delivery mainly by 2009 and there is only just over 9 m dwt to be phased out by 2009 and only a total of 12 m dwt to be phased out by 2015.

The overall situation is not critical but for the tankers 40,000-59,999 dwt there is 3.1 m dwt to be phased out by 2009 and an orderbook of 14.2 m dwt to be delivered within this period. The total phase-out in this segment is 6 m. The total fleet in this segment is some 25 m dwt, and delivery of 4.2-4,5 m dwt over the next years will mean a yearly fleet increase of some 15%.

Smaller tankers will to some extent be replaced by larger ones and the 40,000-59,999 dwt tankers will move into markets currently dominated by smaller ones, but smaller older tankers will also probably to a great extent continue to operate in local trades.

Panamax tankers supply

The panamax segment 59,999 – 69,999 dwt is the smallest tanker segment. The

fleet end 2005 was 19.5 m dwt and the current orderbook is some 10 m dwt. Deliveries in 2006 of 4.1 and the phase-out of 0.6 m dwt will mean a fleet increase of 17%. The fleet is projected to increase by 12% in 2007, and deliveries in 2008 will mean a fleet increase of only 4%. However, there is room for more orders in 2008 and onwards.

Conclusion

Demand for product tankers has been increasing strongly over the last few years. Currently there are signs of weakening demand. The product tanker demand may, however, still continue to be strong due to tight refinery capacity, which may mean a great deal of arbitrage trade In the longer term, new export refineries coming on stream as from 2008 are far from the main consuming areas.

The graphs assumes apossitive development in world economy and oil demand

There is a great deal of tension in the oil market and the oil price has, contrary to expectations, been increasing at the same time as oil stocks have also been increasing. Both the crude and oil product situation is tight and the situation in several major oil producing countries is fragile.

The freight rates for product tankers have over time in general followed the same trend as the tanker market as a whole. The strong peaks in the tanker market in 2001 and 2003 -2006 have been unprecedented. The normal rates in the product tanker market have historically been USD 10,000-15,000 per day. The break-even rate of a MR tanker at USD 40 m, operation costs of USD 5,000 per day and a 6% required rate of return will be some USD 17,000 per day.

There are few time series for spot panamax freight rates. The time charter rates and activity should be a good indication of the situation in this market:

Panamax period contracts of 6 months and above
year / No of contracts / Total dwt / Average period / Average rate USD/day
2000 / 18 / 1,179,766 / 1.0 / 15,888
2001 / 17 / 1,157,647 / 1.9 / 23,078
2002 / 23 / 1,700,500 / 2.0 / 14,688
2003 / 11 / 776,759 / 1.5 / 17,285
2004 / 11 / 819,893 / 1.6 / 18,932
2005 / 8 / 619,959 / 2.0 / 26,400
2006 / 5 / 360,181 / 2.2 / 27,667

The freight rates have been increasing, but few contract have been entered into, meaning that operators have earned more in the spot market than charterers believe the longer term freight level will be.

The demand side in the product tanker market has been strong, and there are several reasons to believe that it will continue to be positive. However, the orderbook appears overwhelming for the next couple of years. The product tanker market is a fragmented, open and free market with many owners (see Appendix II- largest owners) and the rates over time will be break-even.