The tanker market should have “enough in its tank” to recover from its multi-decade lows, thanks to low tonnage supply and an expected increase in oil demand moving forward.

In a recent note, ship owner Teekay Tanker said that “in the fourth quarter of 2021, crude tanker spot rates moderately increased compared to the prior quarter, though rates continue to be below historical averages. Global oil demand grew by 1.5 million barrels per day (mb/d) during the fourth quarter to 100.2 mb/d, primarily due to an increase in global mobility and economic activity as the world continues to normalize from COVID-19 disruptions, and was further boosted by a switch from gas to oil for power generation in parts of Europe and Asia. However, this was offset by the emergence of the Omicron COVID-19 variant, which impacted mobility and therefore oil demand in the latter part of the fourth quarter of 2021. Global oil production increased as the OPEC+ group continued to unwind crude oil supply cuts, though some countries in the group failed to meet their production targets, while unplanned outages in countries outside of the OPEC+ group also tempered the crude oil supply increase. As a result, crude oil supply continued to lag demand, leading to a further drawdown in global oil inventories, higher oil prices, and a steepening of the backwardation in the crude oil price futures curve during the fourth quarter of 2021. The ongoing impact of the Omicron variant on oil demand and a continued increase in bunker fuel prices related to higher oil prices have led to a further softening in crude tanker spot rates during the early part of the first quarter of 2022”.

According to Teekay, “looking ahead, global oil demand is expected to increase by 3.2 mb/d year-on-year in 2022 and to reach 101.6 mb/ d by the fourth quarter of 2022 as per the International Energy Agency (IEA), returning global oil demand to pre- COVID levels. The emergence of the Omicron variant could temporarily slow the demand recovery in the near-term, particularly due to its impact on international travel, though it is not expected to derail the recovery for 2022 as a whole. More importantly for the tanker market, global oil production is set to increase significantly during 2022 as the OPEC+ group plans to unwind its remaining crude oil supply cuts by September 2022 while non-OPEC+ production is set to increase due to higher supply from the U.S., Canada, and Brazil. According to the IEA, global oil supply could increase by up to 6.3 mb/d in 2022 if all supply comes online as planned, which would provide a significant boost to crude tanker demand through the course of the year. The unfolding geopolitical crisis between Ukraine and Russia, and the potential lifting of Iranian sanctions, represent two wild cards which could alter tanker demand dynamics in the coming weeks and months depending on future developments”.

The ship owner added that “tanker fleet supply fundamentals continue to look very positive due to a lack of newbuild ordering, a diminishing tanker orderbook, and higher scrapping. As of January 2022, the tanker orderbook stood at 7.3% of the existing fleet size, which is the lowest since 1996 and well below the long-term average of around 20%. The level of newbuild orders remains very low, with just 3.4 million deadweight tons (mdwt) placed in the second half of 2021, the lowest level of new orders placed in a six-month period since the first half of 2009. The Company expects that the level of new tanker orders will remain low in the near-term due to rising newbuild prices, which are currently at a 12-year high, and ongoing uncertainty over vessel technology. Tanker scrapping has picked up in recent months with 9.5 mdwt removed in the second half of 2021, the highest level since the first half of 2018. For 2021 as a whole, around 15 mdwt of tankers were scrapped versus only 3.5 mdwt in 2020. The Company expects the level of tanker scrapping to remain elevated in 2022 due to the combination of an aging world tanker fleet, weak freight rates in recent quarters, and high tanker scrap prices. The Company is currently forecasting around 2% tanker fleet growth in 2022 followed by less than 1% in 2023 and potentially negative fleet growth in 2024 when ship removals are expected to outweigh new deliveries into the fleet”.

In summary, the Company expects that spot tanker rates will recover from the multi-decade lows seen in 2021 as both oil demand and supply are expected to revert to, and then surpass, pre-COVID levels during the course of 2022. A significant increase in oil supply from both OPEC+ and non-OPEC+ sources is expected to be the main catalyst behind the recovery. However, the recovery is likely to be weighted towards the second half of the year, and the Company may continue to see periods of weak tanker rates through the first half of 2022 as global oil production continues to catch up with demand.

The outlook for 2023 appears positive, as very low levels of tanker fleet growth and a continued recovery in oil demand are expected to lead to higher tanker fleet utilization, and therefore improved spot tanker rates.

Marex Media