Global Tanker Sector: Analysis of 2019 Freight Movements - Essay Sample

Abstract

This report analyses the tanker sector and the freight movements across the globe over the past year. The report scrutinises the growth - positive or negative - of both crude oil tanker fleet and the finished product fleet. An analysis of the rapidly changing import and export trends over the past few years is imperative in order to get an entire picture of the changing trends in tanker freight movements.

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Introduction

In this report, the author shall analyze the significant impacts of the global market re-alignments resulting from various sporadic and systemic changes in international cooperation on the transit of shipments. China-USA trade wars and the US sanctions on Iran come to the forefront while addressing the geopolitical conflicts and their impact on international trade. This analysis includes this changing global trade re-alignment as well as the current coronavirus pandemic reporting the last year of the worldwide seashore tanker transit.

Theoretical Framework

Tanker Earnings Through The Years

Over the past four years, Medium and long-range tanker daily earnings have experienced significant spikes. It is noticeable that the years 2018 and 2019 were the two most successful years in recent cargo earnings history. In the fourth quarter of the two years, the total daily earnings were in record-breaking highs. Severe dips almost always follow these high rates in the Q4 in the coming quarter - Q1 of the following year (Sand 2019, p3; International Chamber of Shipping 2018, p24-27).

Crude and refined oil demands are always high in the fourth quarter and sharply reduced in the first. The earnings for the large crude carriers (VLCC), for instance, experienced the sharpest decline of the transition between 2019s fourth quarter into the first quarter of 2020 (UNCTAD 2020, p53).

In the five years preceding 2017, tanker fleet expansion continued to decelerate steadily. From 2017, however, this trend reversed. There was positive growth in both the fleet expansion and container freight. There was a steady growth pattern in the Fleet from 2017 onwards - rising by 3% in 2017. In 2018, the maritime sector experienced a slower expansion rate. Volumes fell by 1.4% from 4.1% of 2017.

Containerized worldwide port throughput decelerated by two per cent from 6.7 per cent in 2017 to 4.7 in 2018. Such decelerations resulted from such factors as geopolitical turmoil, the Brexit, a slowdown in China and recession in several new economies (Sand 2019, p4; Danish Ship Finance 2019, 15-17).

The following year - 2019 - was characterized by various geospatial re-alignments and some record-breaking tanker turnover. China was the standout performer of the year. While increasing their crude oil import from the Middle East, Chinas crude oil import tonnage rose from 461.9 million in 2018 to 505.7 - representing a record increase. We shall discuss this trade re-alignment by China further in this report. Analysts expect the disturbance of trade as a result of the trade wars between the US and China to stabilise between 2020 and 2021 (Danish Ship Finance 2019, p16-18).

Data Presentation

US-CHINA Trade Wars

The trade wars between the US and China escalated alarmingly in 2018. As two global economic giants, such conflicts had noticeable economic trickle-down effects and trade disruptions throughout the world. In the tanker sector, total imports to China from the US fell sharply from 23% in 2017 to 5% in 2018. While the figures recovered slightly in the following year, it continues to struggle, getting to zero per cent in October 2019 (Sand 2019, p2).

China, as a result of the trade wars, opted to look east for their importation of crude oil. In 2019, China increased its borrowing of Crude oil from the Middle East by 11% - reaching almost half of the total oil imports. China seemed to be finding a new trade ally in Saudi Arabia, with 26.6 million tones increase in seaborne imports raising the total imports from the Middle Eastern powerhouse to over 83 million during the year (Sand 2019, p2-3; Danish Ship Finance 2019, p14-17). Interestingly though, China also reduced its importation volumes from Iran in the months following US-Iran political tensions. Nearly 75% of imports from Iran to China took place before the escalation of tension between the US and Iran.

As the cold war continued between the two powerhouses continued, the US looked to develop new export ties with Europe and Asia. Interestingly, the US reported its highest export volumes for years in 2019 - generating 1086.6 billion tonne miles in export - contributing to 10% of the total global share of seaborne crude oil trade (WWSA 2020).

After years of disruptions, the China-US crude oil trade was set to improve in the later parts of 2019 and the beginning of 2020. A Phase One agreement between the two countries meant that China would reopen their shows for crude oil from the USA, committing to buy an extra USD 18.5 billion worth of energy goods in 2020. Such a trade agreement would thereby mean well for both economies and will significantly increase the total tanker volumes from the US to the rest of the world. Market analysts do not, however, predict a direct exportation rise for the US but rather merely a trade diversion (Sand 2019, p4).

Evaluation Of The Year 2019

Annual Fleet News

BIMCO projected the oil tanker fleet to experience a reduction in growth from 6.2% in 2019 to 1.8 in 2020. The IMO 2020 sulfur cap created anticipation in the projected demand for crude oil in the various economies. This anticipation led to a sharp increase in oil tanker fleet volumes as the owners scrambled to profit from the changeover to sulfur-free oil. The fear of potential sanctions also spiked the growth of crude oil fleet in the first half of 2019 (UNCTAD 2020; Sand 2019, p4).

The capacity of the global Fleet rose to 814 in 2019, carrying over 250million deadweight tons of crude oil. This total crude oil volume represented the highest ever seen in terms of capacity and fleet number. There was a total of 68 VLCC in 2019, carrying upwards of 21million tons of shipment and representing an 8.5% increase in the VLCC fleet (WWSA 2020; Sand 2019, p4).

In the oil products sector, there was also an increase in product fleet by 4.6% in 2019. The most remarkable growth appeared in the LR2 Fleet, which rose by 6.7%. A more restrictive growth in the product tanker sector is expected in 2020, with analysts putting the figures tentatively at 2.0%. The expected growth rate did not, however, factor in the now worsening impacts of the COVID19 pandemic (Sand 2019, p5).

Supply-Demand Imbalance In 2019

Analysts reported an overwhelming supply trend for most of 2019. The 6% growth in Fleet stated here meant that the supply was robust for most of 2019. This steady supply was, however, accompanied by sluggish demand for crude oil. The essential characteristic of the year was the low scrapping and low postponement of orders (Danish Ship Finance, 2019, p16; UNCTAD 2020, p53-56).

The stable supply trend in 2019 allowed economies like the US to increase their travel distances in exportation. Such longer distances necessitated the reduction of cargo-carrying capacity of the Fleet, and as such, more Fleet joined the export economy (UNCTAD 2020, p54).

Thankfully though, the IMO 2020 came over and mitigated this growing gap between supply and demand of 2019. It is also projected, however, that IMO 2020 will only lead to a short time boost for the earning. Only a low percentage of the Fleet (under 4%) was older than 20 years and thereby liable to demolition (Alizadeh and Nomikos 2013; Danish Ship Finance, 2019; Sand 2019; WWSA 2020).

Increased distances for the US fleet as a result of - among other factors - production cuts by OPEC will only, however, be temporary. Entering the first phase of 2020, OPEC is expected to reenter the production market, thus further stretching an already depressed demand market (Krauss, 2020).

UNCTAD (2020, p58) predicts that the world is moving from the completely globalized oil and merchandize trade to a rather regionalized one. With economies like China restructuring their trade patterns and opting for more regionalized trade, the new standard taking shape will have a severe ripple effect in global tanker movements. Growth in the global business and economy shall thereby remain moderate at best.

The various characteristics of the new routine included disruptions caused by climate and environmental policy restructuring, technology, and the increasing position played by associated services in value chains. Global warming and carbon footprint conversations continue to take centre stage in global forums. Such conversations call for more future-looking policies that will assist the economies in handling unpredictable changes (UNCTAD 2020; Danish Ship Finance 2019).

Market Outlook

The New Year 2020 started with a myriad of uncertainty in the seaborne sector. The ravaging impacts of the COVID19 pandemic eroded the potential for a robust Q1 of 2020. While the International Energy Agency (IEA) had forecasted the oil demand for 2020 to stand at over 1.2million barrels per day, the actual forecast after the pandemic now stands at only 0.8million BPD. Worse even, the projections for Q1 of 2020 had the demand fall to just 0.4million BPD (UNCTAD 2020; Danish Ship Finance, 2019 p15-17; WWSA 2020).

This uncertainty is further compounded by the re-release of over 20 VLCC tankers into the market in January, adding pressure to an already volatile market. The lifting of sanctions on China by the US during the most unpredictable times in the market continue to pose an unprecedented challenge to the tanker supply and demand chain (WWSA 2020).

As of the present, furthermore, the full effect of the coronavirus pandemic is unclear to the analysts. The position of china at the centre stage of oil trade, however, puts the world in a delicate state, considering that China had to halt most of its import lines as a response to the pandemic. Chinas refineries and companies slowed down their production in response to the epidemic. The Government-owned Sinopec, for instance, announced a 0.6million BPD reduction in their crude oil refinery (WWSA 2020; Krauss 2020).

OPEC Position In Oil Trade

Beginning the year at a lower demand will complicate the already sluggish demand projections from 2019. OPEC will, as such, continue to lower their production of crude oil - as they already began to reduce back in December 2019. This reduction in output by OPEC leaves the US exportation sector in a precarious situation and derails the Phase One of their trade agreement with China (UNCTAD 2020).

Since December 2019, the OPEC oil producers continue to strive for production cuts to balance out the global supply-demand duality. Led by Russia and Saudi Arabia, the countries recently slashed up to 9.7million BPD of crude oil production. The planned cut that intends to come into effect between May and June will offset around 10% of the worlds global manufacturing and ease the tension (Krauss 2020).

While the two primary OPEC members agreed on the production cuts, Mexico - their collaborator - resisted this great move. They were only willing to cut 25% of whatever fellow OPEC countries were requesting. The non-collaboration by Mexico created some tension within OPEC, thus compounding the uncertainties that have already been commonplace in 2020. Most of the OPEC nations opt to store crude oil in strategic reserves until the economy is restored (UNCTAD 2020).

Nonetheless, this reduction of production volumes by OPEC countries projects a corresponding impact on tanker fleet volumes. This fall in production will reduce the tanker fleet operating thro...