Throughout the year, headlines related to the energy market have been saturated with stories regarding the US oil boom. Oil production in the US was almost 6.5 million b/d at the end of September, the highest level since the late-1990’s, according to the Energy Information Administration (EIA). In the backdrop of this development, there have been discussions about the US becoming the world’s largest crude oil producer by 2020, which are reinforcing the elusive dream of energy independence. In line with this, during the first nine months of 2012, total crude oil imports have declined by 3% compared to 2011. While this statistic is significant, it appears to have a greater impact on the import volumes of sweet crude oils due to the make-up of Bakken crude from North Dakota. Highlighting this, imports from Nigeria have roughly halved to about 400,000 b/d during the reporting period.
Reduced lending activity from traditional ship finance providers has industry participants looking towards private equity investors to bridge the gap in capital. Much of the ship finance lending activity in 2012, and likely continuing into 2013, will focus on restructurings and existing loan portfolios at the large shipping banks. Private equity groups make investments in shipping through a number of different structures including: direct investment, bridge financing, mezzanine financing, debtor-in-possession financing, sale-leaseback transaction, and joint ventures.
Despite the pressure tanker markets have been under for the majority of the year, the price of second hand assets has been relatively stable. Figure 1 illustrates the sales price of five year old tankers through the first eleven months of 2012. In the larger tanker classes, five year old VLCC and Suezmax tanker prices were essentially flat while there was a gradual decline in the Aframax, Panamax and MR2 sectors. A five year-old VLCC had an average price of US $58 million year-to-date, down about 40% for the same time period in 2010. Throughout the same period of time, five year-old MR2s have declined by 20% from US $26 million in January to US $21 million going into November. This has occurred despite the robust trading activity of clean petroleum products and highlights the potential pressure facing this sector from a large orderbook and the expectation of future deliveries. As stated in our previous Industry Note, Delayed Reaction, throughout the first 10 months of the year 77 MR2 tanker orders have been placed.
Any individual that has a connection to the tanker industry is aware of the glut of vessels that are presently operating in the market. This supply of ships is the result of tanker owner’s confidence on the back of robust rates back in 2008. On their own, the delivery of these tankers would have been enough to pressure owners’ earnings, but in today’s environment of falling oil demand growth and a weak economic outlook, the pinch has become a squeeze.
In the aftermath of Hurricane Sandy, we will attempt to gauge its immediate impact on the tanker and petroleum markets. This is a difficult task as the wake of destruction caused by the storm has cut lines of communication, raising the challenge of discerning rumors from fact. Although the situation seems to be improving by the hour the lack of mobile phone service, computer servers and power have made the last few days trying.