Much has been said about the product tanker market recently, mainly about tonnage supply. More industry voices are speaking about their concern of over-ordering and too many ships. However, the number of vessels on order and planned for delivery is really only half the story. As long as there is enough demand, any number of ships on order may be acceptable. Concern about oversupply only occurs when there are too many ships relative to demand. In this note we look at product tanker demand to try to quantify the other half of the story.
Since the beginning of the global economic crisis in 2009, the average age of VLCC tankers sent to the breakers has been reduced to approximately 22 years of age. Despite the ongoing economic recovery, earnings for VLCCs have remained pressured, disconnecting from a historical correlation to scrap prices. Scrap prices closely follow the pace of economic activity measured by world steel production. In this note, we analyze the divergence in this historical correlation (scrap prices, VLCC earnings) by focusing on the impact of US Shale oil production.