McQuilling Services Announces Release of 2019-2023 Tanker Market Outlook
McQuilling Services Announces the Release of the
2019-2023 Tanker Market Outlook
New York – February 4, 2019 – McQuilling Services is pleased to announce the release of its 2019-2023 Tanker Market Outlook. This 200-page report provides a five-year spot and time charter equivalent (TCE) outlook for eight vessel classes across 24 benchmark tanker trades, plus four triangulated trades. Also included in the report is a robust five-year asset price outlook as well as a one and three-year time charter rate forecast through 2023.
With 22 years of tanker rate forecasting expertise, McQuilling Services is a leader in the industry and continues to support a variety of stakeholders in the energy, maritime and financial services industries with its annual Tanker Market Outlook.
The McQuilling Services rate forecast is based on the evaluation of historical and projected tonnage supply and demand fundamentals in the tanker market within the current and projected global economic environment, including oil supply and demand expectations. The forecasting process begins with the development of quantitative models, which are used to measure the correlation between historical freight rates and tanker supply and demand. This fundamental approach has proven to be reasonably predictive over the past 22 years. However, the forecasting process evolves past the modeling stage when the quantitative results are balanced with experiential knowledge and reasonable market assessments. In 2018, our forecasts were within 10% of actual market levels.
Key findings from 2018
In 2018, global ton-mile demand to transport crude and residual fuels increased by 1.9%, supported by a 1.4% increase in VLCCs (which accounted for 63% of the total demand for dirty tankers). Suezmax demand accounted for 25% of all DPP demand in 2018, 1% higher than 2017 due to higher crude exports from the Southern Europe and North Africa load region.
Crude pricing differentials initially favored long-haul flows from West to East; however, a surge in Middle East supply to re-establish baselines transferred crude volumes back to the Arabian Gulf, drawing Asian ballasters away from the West and exploding trans-Atlantic demand for US crude oil. Middle East crude supply averaged about 160,000 b/d higher year-on-year, supporting volumes to the East, while demand for Arabian Gulf > West remained under downward pressure, a trend projected to continue.
Transportation demand for refined products increased by 0.4% year-on-year in 2018 amid a 3.0% rise in LR2 demand, while the remaining vessel sectors experienced lower demand due to declining volumes transported in the LR1 sector and lower mileage traveled in the MR2 sector.
LR2 ton-mile demand increased by a solid 3.0% in 2018, broadly in-line with our January 2018 prediction of accelerating growth as the revival of the Middle East > Northern Europe gasoil and jet fuel trade supported demand. Our ton-mile demand estimates show growth of 25% year-on-year for this trade, accounting for 13.4% market share.
Over the course of 2018, we counted 106 dirty tankers and 35 product + IMO III tankers delivered to the trading fleet. VLCC deliveries decreased relative to 2017 with 39 vessels observed in 2018 and a similar occurrence for the Suezmaxes at 32 additions. On the clean side, we recorded 16 LR2s, 12 LR1s and seven MR2s joining the fleet.
The number of vessels that exited the fleet in 2018 matched within 1% of our January 2018 projections, as 134 ships were sold for demolition or conversion, compared to our original January 2018 forecast of 133.VLCC removals totaled 35 tankers in 2018, while Suezmaxes and Aframaxes came to 22 and 37 vessels respectively.On the clean side, we observed a total 32 vessels exit the trading fleet in 2018.
Newbuilding ordering activity decreased 20.5% year-on-year in 2018 within the DPP sector amid tempered interest in the VLCC and Aframax segments, particularly in the second half of the year. In 2017, 62 VLCCs were placed on order, which fell to 43 in 2018. Suezmax orders remained flat at 25 vessels, while Aframax orders decreased to 32 vessels. Clean tanker ordering activity through 2018 represents a 14.3% increase in comparison to the previous year with 18 LR2s and 8 LR1s contracted. In the MR2 space, ordering gained 17% year-on-year with 76 vessels in 2018, while the MR1s observed less activity at 10 vessels.
Global economic growth decelerated in 2018, falling to an estimated 3.7% versus 3.8% in 2017. According to the International Monetary Fund (IMF), GDP growth is expected to temper to 3.5% in 2019, a downward revision due to trade tensions between key nations and European political uncertainty.
Global oil demand growth is likely to decelerate over the forecast period, down to 860,000 b/d in 2019 before falling further to just 394,000 b/d by 2023.Global crude supply growth is similarly projected to slow down, rising by 830,000 b/d in 2019 amid downward pressure from OPEC production cuts, offset by gains in North American and European output.
Crude and residual fuel ton-mile demand is projected to increase by about 0.9% on an annual basis throughout the forecast period with a decelerating trend observed in the outer years.We project 2019 demand growth of 1.0% as participants in the OPEC and non-OPEC production cut agreement limit crude output from the Middle East, somewhat counteracted by higher exports from the Atlantic Basin. We project annualized growth of 2.0% and 2.3% for the LR2 and LR1 sectors through 2023 and just below 1.6% for MR2 tanker
We anticipate total DPP 2019 deliveries of 134, before decelerating to 102 in 2020, which will begin to support a freight rate recovery to commence in the context of increasing deletions over the next two years.Our projections indicate that 58 product tankers will deliver to the trading fleet in 2019, partially offset by 39 deletions, while beyond this point we see greater contraction in the fleet.On the chemical side, the delivery schedule for IMO I + II tankers picks up to 74 vessels in 2018 before dropping to 58 vessels the following year.
On the basis of supply side pressure as well as demand indicators pointing to decelerating growth, we expect freight rates in 2019 to appreciate marginally; however, support for TCEs will stem from lower bunker prices with VLCCs averaging US $26,800/day and Suezmaxes averaging US $18,800/day.However, we see a much tighter balance for VLCCs in 2022 with earnings climbing to US $33,700/day.
The story is quite different on the clean side of the market as supply fundamentals improve with growing demand earlier in the cycle.Spot market earnings in the LR2 and LR1 sectors are projected to average US $17,100/day and US $16,700 in 2019, respectively.MR earnings on a round-trip basis are, in general, expected to rise in 2019 with TC2 TCEs averaging US $6,600/day; however, higher earnings of US $14,500/day can be attained on the basis of the Atlantic Basin triangulation.Potential for supply side pressure on clean freight rates becomes evident in in the back-end of our forecast period based on analysis of our new long-term delivery forecast methodology.
The relationship between time charter rates and spot market earnings was strong in our analysis and formed the foundation for our time charter forecasts. For VLCCs, we project 1-year and 3-year time charter rates to average US $31,500/day and US $32,000/day in 2019, respectively.
Our 2019 price forecast for the 5-year old crude tanker sectors sees VLCC values averaging US $66.1 million, a 5.4% increase from the 2018 average price of US $62.7 million. Modern Suezmax tankers are projected to demand US $45.0 million in 2019 with further appreciation to US $56.1 million in 2023.
Clean tankers of this age group (5-year) are expected to see higher prices relative to their 2018 averages. For the LR2 space, we forecast a 2019 average price of US $37.8 million, a 5.2% increase from the average price recorded in 2018, while the LR1 sector is expected to see larger gains of 14% year-on-year to average US $32.7 million. The MR2 tanker is likely to appreciate 15% to US 30.7 million in 2019.
What’s New in 2019?
In the 2019-2023 Tanker Market Outlook we have incorporated a variety of new features to provide our clients with a more robust view of global trade flows and major tanker trades:
- Enhanced utilization of remotely-sensed vessel position data to capture fleet growth in terms of newbuilding deliveries and vessel deletions
- Refined methodology in forecasting global bunker prices utilizing forward product cracks relative to a projected Dated Brent crude outlook
- Investment analysis providing insight into our projected unlevered returns for each tanker sector with discussion on the financial benefit of scrubber economics as well as an “Efficient Frontier” analysis, displaying various hypothetical portfolio constructs a fleet owner can employ when managing their assets
- Addition of the Aframax 70,000 mt USG > UKC trade to our freight rate forecast table expanding our coverage to 14 dirty and 10 clean tanker trades
McQuilling Services 2019-2023 Tanker Market Outlook can be purchased online at www.mcquilling.com/reports or by calling 516-227-5700.
McQuilling Services is the marine transportation consulting and advisory group of McQuilling Partners, Inc. The primary focus of McQuilling Services is to provide clients commercial consulting services related to global seaborne transportation and related disciplines in the supply chain. The approach of the Company is to develop products and services based on specific client requirements, data, and the systematic employment of quantitative methods, bringing individually crafted solutions to client’s needs. The Company employs a collaborative business model combining experienced internal resources with exceptional industry partners to produce a team of directed experts. This model creates a targeted, content-rich knowledge and experience base to serve clients’ needs cost effectively.