In the weeks leading up to 2020, a lot of analysts were predicting a solid rebound in product tanker market freight rates, a scenario which, for the most part, was materialized. So, how has the market reacted in the weeks after the start of 2020? In its latest weekly report, shipbroker Gibson said that “2020 was always going to create a more complex fuel oil market as trade flows shifted and new grades emerged. The first and most obvious impact was a collapse in the volumes of high sulphur fuel oil (HSFO) flowing from West to East – a trend which emerged from the second quarter of 2019. Trade in low sulphur fuel oil (LSFO) then gradually began to rise from Q2 2019 as traders/suppliers sought to gradually build stocks ahead of 2020. However, total volumes (irrespective of sulphur content) have not recovered to the levels seen in 2018, with lower arbitrage flows impacting on long haul tanker movements. In 2018, 1.17 million b/d of fuel oil was shipped from West to East. In 2019, this dropped to average 760,000 b/d, (down by 410,000 b/d YOY). So, where has this fuel gone if it hasn’t headed East, and how are fuel oil flows expected to evolve in the future?”
According to Gibson, “the US increased imports of HSFO and vacuum gasoil (VGO) towards the end of 2019 and is expected to remain an outlet for these grades for the foreseeable future, providing pricing is favorable. Seasonal fluctuations will of course play a role. Eastbound HSFO trade is expected to pick up in the summer when Middle East energy demand peaks. Given OPEC+ cuts, Saudi Arabia and other Middle East producers will likely burn more fuel oil in order to minimize crude direct burn (which has declined in recent years anyway)”.
The shipbroker added that “China had been expected to add to VLSFO supplies, having introduced a tax rebate in January. However, given the coronavirus outbreak, higher Chinese supplies might take time to emerge, supporting Asian import demand. Although, this may be countered by lower bunkering demand if global trade is particularly hard hit. The startup of two 35,000 b/d very low sulphur fuel oil (VLSFO) producing units in the first half of 2020, (one in Malaysia and one in Korea) will add to regional VLSFO supply later in this year, which when combined with expected higher output from China, may limit the need to increase LSFO imports into Asia. The eventual startup of Aramco’s Jazan refinery is also expected to add to Middle East fuel oil availability, potentially reducing Saudi Arabia’s import requirements”.
Gibson added that “it is also unclear at this stage how much HSFO has been eradicated from the system through refinery upgrades or changing crude slates. Given that large scale floating storage has not yet emerged, it appears the global system has been able to absorb much of the surplus. Looking at inventories in the major bunkering hubs, except for Fujairah, fuel oil/residue stocks (irrespective of sulphur content) are within historical ranges. Demand for marine gasoil (MGO) as a bunker fuel (at the expense of VLSFO) remains uncertain. Initially, MGO was expected to be the preferred bunker fuel of choice until VLSFO supply and quality concerns were overcome. However, VLSFO stole an early march on MGO. Now, reports are emerging from Northern Europe that bunker sales have been shifting in favour of MGO in recent weeks. The expectation remains that VLSFO will become the dominant fuel, although only time will tell. The markets will continue to adjust over the coming months, after which it will become clearer which trends are long term vs. short term adjustments”.
The shipbroker concluded that “another testing week for unbalanced VLCCs to endure.Rates remained stuck in the very low ws 40’s East and theoretically mid ws 20’s West via Cape but scrubber fitted units were willing into the mid ws 30’s East, which would translate into loss making returns for non-fitted units. With Chinese demand waivering and availability still weighty, Owners truly have nowhere to go…delays and disruptions developing in the Far Eastern hubs are the only realistic hope. Suezmaxes drifted sideways, and then downwards upon insipid demand and easy supply. 130,000mt by ws 75 East and to ws 35 West now, with little expectation of any near term snap back. Aframaxes wrestled free from their muddy 80,000mt by ws 100 AGulf/Singapore bottom but so far by only a few ws points, the groundwork has now been done for something a bit better next week though”, Gibson said.
Oil product stocks at Fujairah in the UAE fell 6 percent week on week to 22.804 million barrels on 10th February, with inventories of all products falling except light distillates, which hit a 6-month high, data released by the Fujairah Oil Industry Zone, FOIZ, showed.
Stocks of heavy distillates and residues, including fuel oils used for marine fuel and power generation, fell 7.6 per cent in the week to 11.88 million barrels, the data showed.
Middle distillates inventories, which include jet fuel, marine bunker gasoil, kerosene and diesel, plunged 27.3 per cent over the same period to 2.949 million barrels, the lowest since 28th September last year.
However, inventories of gasoline and other light distillates bucked the downtrend, rising 8.8 per cent on the week to 7.975 million barrels, the highest since 19th August last year, according to the FOIZ data compiled by S&P Global Platts. Platts holds exclusive rights to publish Fujairah oil inventory data, and has deployed a blockchain network for its collation.
FOIZ was established to develop the petroleum strategy for investment in the region. According to FOIZ, 11 terminals are participating in the weekly stock reporting, including storage volumes involved in activities such as blending and refining.
The coronavirus’s effect on energy markets is worsening, as the sharp fall in demand in China, the world’s largest importer of crude, is stranding oil cargoes off the country’s coast and prompting shippers to seek out other Asian destinations.
More than 1,360 people have died from the coronavirus in China, which has disrupted the world’s second largest economy and shaken energy markets, with international benchmark Brent crude oil down 15% since the beginning of the year.
Major international energy forecasters expect demand to fall in this quarter, the first drop in a decade, due to the outbreak.
Chinese refineries have cut output by about 1.5 million barrels per day (bpd) over just two weeks, causing crude stocks to pile up.
That has left numerous Very Large Crude Carriers (VLCCs), capable of holding more than 2 million barrels of crude each, unable to unload at China’s top crude import terminal of Qingdao, Refinitiv data shows.
Other cargoes are being diverted to South Korea, Malaysia, Singapore and other locales in China, while storage tanks in Shandong province – where Qingdao is located – are filling swiftly, sources said.
Oil storage tanks in China’s eastern Shandong province are nearing peaks seen last June as independent refiners slash processing rates, industry sources said.
“We are cutting runs, but we still have (crude) cargoes on the way,” said a Chinese refinery source, adding that the company was still exploring options as land storage is limited and it is costly to store on ships.
Shandong’s commercial and strategic crude oil stocks are currently at 171.5 million barrels, not far from their peak of 175 million barrels in early June last year, according to oil analytics firm Kpler.
“In theory, there is a lot of spare capacity to fill, but we have never seen this full utilization” of storage, said Kpler analyst Alexander Booth, adding that utilization rates are currently at 61% in Shandong, versus 63% at last year’s peak.
China’s overall crude storage is at 760 million barrels, versus a peak of 780 million barrels in early June last year, Kpler’s data shows.
DEMURRAGE COSTS RISE, FREIGHT RATES PLUNGE
The lack of space in tanks is prompting traders to divert cargoes scheduled to arrive in February and March until China’s demand improves, multiple trade and shipping sources said.
When vessels cannot be unloaded, their charterers have to pay what is known as demurrage costs. Those fees have climbed to more than $100,000 per day for a cargo arriving next week compared with about $90,000 per day for those loaded 40 days ago, prompting some shippers to try to transfer crude to older tankers that cost less to operate, they said.
Freight rates meanwhile, have plunged to nearly half the levels they were at as the virus has hit demand and after the U.S. partially lifted sanctions on one unit of Chinese shipping firm COSCO.
Sources at Shandong ports said while storage levels are high, they are working with refineries to move oil out and make way for more cargoes that are expected to arrive in the coming weeks.
“The pace of moving crude out from tanks is slow. So if vessels are arriving at the same time, some of them might need to wait for 2-3 days,” said a source at Rizhao port in Shandong.
“We still have around 30% of space at our oil storage at this moment, which is already a lot better than the previous weeks, as truck drivers are gradually returning to work.”
Manufacturing activity was paused for the Lunar New Year last month when the virus struck, preventing workers from returning to their jobs.
State-run ChemChina has diverted some crude oil cargoes which were supposed to arrive in China to floating storage near Malaysia, a source with direct knowledge of the matter told Reuters. ChemChina did not respond to an email seeking comment.
Oil traders have signed new crude oil storage leases in South Korea, the nearest storage option to Qingdao, this week, said a source familiar with the matter.
Two supertankers – Universal Winner and Aegean Dream – carrying Brazilian crude originally heading for China have been diverted to the Singapore straits, Refinitiv data showed.
The tanker market has had quite a ride during the first month of 2020. According to the latest monthly report from OPEC, issued this week, dirty tanker spot freight rates in January continued the roller coast movement seen since September, this time giving back almost half the gains made in the previous month. However, rates remained some 50% higher than the same month last year, as the market remained optimistic about an improvement in rates in 2020. Seasonal factors were a key contributor to the decline. The outbreak and rapid spread of the Coronavirus temporarily upended the tanker market starting at the end of January, disrupting trade with China, the world’s largest crude importer, and is certain to weigh on rates in February. After rising steadily since September 2019, clean tanker rates fell back in January, but remained slightly higher than the same month last year. Rates benefited from a strong start to the year, but have fallen in recent weeks, driven by seasonal factors.
Global spot fixtures edged down slightly in January, declining around 0.10 mb/d or 0.5% m-o-m, but down 1.6 mb/d, or 8%, compared to the previous year’s levels.
OPEC spot fixtures averaged 12.58 mb/d in January, up 1.4% or 180 tb/d higher than the previous month, but still almost 9% or 1.2 mb/d lower y-o-y. Fixtures from the Middle East-to-East jumped by almost 15%, or 1 mb/d, to average 7.71 mb/d in January, but fell 3% below last year’s level. Middle East-to-West fixtures were sharply lower, down nearly 30% to 1.1 mb/d. Compared to the same month last year, rates on the route fell by over 18% or 260 tb/d. Outside of the Middle East fixtures averaged 3.75 mb/d in January, a decline of 0.5 mb/d, or over 11%, from the previous month, and were down 16%, or 0.7 mb/d, compared to the same month last year.
OPEC sailings declined by less than 1% m-o-m in January to average 24.93 mb/d. Sailings from the Middle East were 2%, or 120 tb/d, higher to average 18.36 mb/d in January. Crude arrivals were largely positive in January. Arrivals in the Far East increased 3% m-o-m and remained broadly in line with levels seen the same month last year. Arrivals in Europe were up 1% or 140 tb/d higher m-o-m but showed a stronger 9% or 1 mb/d increase y-o-y. Arrivals in North America were broadly unchanged from the previous month but were 12% or 1.3 mb/d lower y-o-y. West Asia was the only route showing a decline, down 200 tb/d or almost 5% m-o-m, but 130 mb/d or 3% higher y-o-y.
Very large crude carriers (VLCCs)
VLCC spot freight rates declined 17% in January, erasing the gains seen in the previous month to stand at WS79 points. The Middle East-to-East route has been up-and-down over the past four months, averaging WS93 points in January. Freight rates registered for tankers operating on the Middle East-to-West routes in January were down 16% m-o-m. At WS53 points, rates on the route were more than twice as high as the same month last year. West Africa-to-East routes in January also showed a similar pattern, down 17% m-o-m to stand at WS90 points, representing a gain of almost 60% compared to January 2019.
Suezmax average spot freight rates edged lower in January, declining 7% following a gain of 36% the month before. Y-o-y, Suezmax rates were 67% higher in January.
Rates for tankers operating on the West Africa-to-US Gulf Coast (USGC) route averaged WS130 points, representing a m-o-m decline of 8% in January. Y-o-y, however, rates were 68% higher in January compared to the same month last year. The Northwest Europe-to-USGC route edged down 3% m-o-m to average WS108 points, which was some 66% higher than the same month last year.
After a strong finish to the year, Aframax rates fell back some 7% to average WS119 points, but remained 42% higher than the same month last year. The Indonesia-to-East route was 18% lower to average WS151 points, but still represented a gain of 35% y-o-y. Both the intra-Med and the Med-to-Northwest Europe routes fell 24% to average WS151 points. Both routes, however, saw y-o-y gains of 15% and 9%, respectively. Only the Caribbean-to-US East Coast route enjoyed a m-o-m increase, up 29% to average WS320 points, which was 90% higher y-o-y.
The clean spot tanker market declined for the first time since August, down 19% but still 7% higher than the same month last year. Clean tanker spot freight rates West of Suez averaged WS251 points, representing a decline of 20% since the previous month. The Mediterranean-to-Mediterranean and Mediterranean-to-Northwest Europe routes saw declines of around 24% to average WS214 points and WS224 points, respectively. Meanwhile, rates on the Northwest Europe-to-USEC route fell 8% to WS165 points. However, rates on West of Suez routes all showed improvements of up to 25% compared to the same month last year. On the East of Suez route, clean tanker spot freight rates fell 17% m-o-m in January to average WS170 points, with the Singapore-to-East route declining 14% m-o-m to average WS152 points, while the Middle East-toEast route declined 20% m-o-m to average WS130 points.
When we last looked at the IMO 2020 MARPOL Annex VI policy back in 2018 Q4, there were many sources of ambiguity in terms of the outlook. These included scrubber uptake, fuel options and availability, freight rates and the expectations on policy enforcement. As we approach the 1 January 2020 deadline for the policy, we have greater clarity on the likely impact of the policy on fuel prices. CRU’s view is that the IMO 2020 regulation is likely to raise freight rates by around 10-20%.
Scrubber uptake has been more prevalent than anticipated
From our discussions with Maritime Strategies International (MSI) and other active participants in the freight market, we now expect a higher uptake of scrubbers. We estimate that 20-25% of the larger Capesize vessels will have scrubbers fitted by end 2020. For the mid-size Panamax vessels, the uptake is lower at 5%. The smaller Handymax vessels are unlikely to install scrubbers at all. Considering the share of each type of vessel we calculate that in 2020, 10%-15% of total ocean-going freight capacity will employ scrubbers, rising to ~20% by 2025. More Capesize capacity will be fitted with scrubbers because the vessel size and the typical length of voyage mean a larger volume of fuel is burned making the capital investment and the pay-off period much more attractive. In addition, Capesize vessels generally travel on fixed routes between very large ports (e.g. Brazil or Australia to China), where the likelihood of the high sulphur fuel oil (IFO180) being available is greater than that of a small port.
We have revised our process for calculating the optimal time period over which the investment in a scrubber is expected to be paid off. We now consider only the difference in freight rates as the variable that will determine the optimal pay-off period. As a result, the pay-off period is now expected to be 12-18 months, on average. Of course, we expect this to vary between different shipowners for a variety of reasons.
Of the vessels fitted and due to be fitted with scrubbers, most have opted for the open loop option (where the exhaust gases are washed with sea water and discharged into the sea). This comes as a surprise as closed-loop scrubbers initially were considered to be more environmentally friendly as the ‘waste’ was instead disposed of after treatment at ports. However, since some studies have concluded that there is no notable negative environmental impact to using open loop vessels, many companies fitting scrubbers are willing to take the risk; they are assuming that there will not be a subsequent policy to remove open-loop scrubbers from operations any time soon. Open loop scrubbers cut down on installation and running costs, along with the logistics of carrying and disposing of the waste. There are some regions (Singapore and Fujairah) where an open loop scrubber is not allowed to operate, but until we see such controls at major ports such as Rotterdam, Qingdao and Newcastle the movement of bulk vessels will be largely unaffected.
Fuel blending will achieve compliance
Bunker fuel is a residual fuel of the oil refining process, it is cheap, has high sulphur content and has been the standard fuel used by the shipping industry. The most common types of bunker fuels are IFO 380 and IFO 180, in our work we have focussed on IFO 180. The IMO regulation will limit sulphur emissions and therefore requires shipowners to consider the options available to comply. Fuel blending will be key to achieving compliance. The extent to which fuel type needs to be changed depends on the extent to which emissions need to be cut.