McQuilling Releases 2016-20 Tanker Outlook

 

This report is a five-year outlook for eight vessel classes across 18 benchmark trades and represents the company’s 19th forecasting cycle.  After over 10 years of tanker rate forecasting, 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.

 

Our full-year 2015 projection from last year’s Tanker Market Outlook tracked within 5% of actual market levels on the 15 trades forecasted.  For the nine DPP trades, the original forecasts ended the year within 3% of recorded levels, while the six CPP trades ended within 7%.
   
Methodology
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 18 years.   However, the forecasting process evolves past the modeling stage when the quantitative results are balanced with experiential knowledge and reasonable market assessments.   

 

Between 2014 and 2015, global ton-mile demand to transport crude and residual fuels increased by 2.4%, supported by an 11.9% increase in Suezmax demand amid higher European refinery utilization and more distant supply sources for this region.  VLCC demand rose by less than 1%, while Aframax demand declined for the fourth consecutive year.

 

Meanwhile, clean product ton-mile demand grew by 9.5% in 2015 versus year ago levels, as expanded Middle East refining capacity and naphtha arbitrage opportunities supported trade to the Far East and Northern Europe.  Increasing gasoline and jet fuel demand from the United States was met by supplies from the Far East and the Indian Sub-Continent in greater volumes, while delayed refinery projects in the Caribbean and South America resulted in healthy export volumes for US Gulf refiners.

 

Actual vessel deliveries in 2015 totaled 110 vessels.  This was 45 below our expectation given at the start of the year.  This represents a slippage rate of approximately 29% in deliveries from our original forecast.  The slippage can be attributed to yard delays and cancellations from the large orderbooks in previous years, owners altering ship type during the construction phase and financing constraints. 

 

Vessel deletions were notably lower than our January 2015 estimates with only 19 vessels being removed from the trading fleet amid a strengthening earnings environment and declining steel prices.

 

New tanker contracting in 2015 increased to 345 from 203 new orders in 2014. We analyzed changes made to the 2014 orderbook that may not have been reported at time of writing last year to include bulker order conversions and product tanker classification of Aframaxes and Panamaxes.  The 2015 orderbook was led by robust ordering for crude tankers as 65 VLCCs, 69 Suezmaxes and 62 Aframaxes were contracted.  For the clean side, LR2 and LR1 orders of 30 and 27, respectively, were recorded in addition to 75 MR2 orders.

 

The IEA projects that world oil demand will rise by 1.2 million b/d in 2016, followed by annual average growth of 1.16 million b/d through 2020. OECD demand growth is expected to stagnate over the forecast period due to improvements in efficiencies and fuel switching. 

 

Oil demand growth will continue to be driven by non-OECD economies.  As a result, non-OECD countries will make up 54% of estimated oil consumption by the end of the forecast period.  China’s oil consumption will rise by roughly 1.7 million b/d to just shy of 13 million b/d through 2020.  However, improving economic sentiment in both the US and to some extent, Europe, could provide further support from OECD countries. 

 

The relaxation on the US crude export ban will see about 200,000 b/d (in addition to Canadian exports) of US crude flows to Europe and South America.  Combined with an expected production decline of 400,000 b/d in North America, US refiners will look to augment domestic feedstocks with increased foreign imports.  US Gulf refiners will revitalize trade with Middle East and Caribbean producers, while US Atlantic Coast refiners seek supply from West Africa in larger quantities.

 

Within the tanker sectors, limited supply growth in the Aframax sector of only 3.5% through the end of 2020 in addition to paradigm shifts in demand (US exports, Panama Canal) will enable this sector to outperform the larger crude tankers.  Aframax earnings are likely to outperform and may benefit from additional triangulation opportunities in the Atlantic Basin.  Additional Caribbean exports to the US and Europe are likely to result in increased demand for tonnage and with a measured supply outlook; we anticipate owners will earn US $28,396/day on average through 2020 for Aframax trades.

 

For the clean sector, expected demand growth of 4.5% in 2016, will be slightly less than average inventory growth of 4.6%, providing minimal pressure on rates for the larger clean tankers which are expected to increase market share of transported clean petroleum products.  Clean tanker earnings on the TC1 and TC5 routes are projected to be US $30,462/day and US $23,750/day in 2016.

 

A continuation in MR2 fleet inventory growth, coupled with gradually slowing demand growth, will place moderate pressure on freight rates in 2016, before the balance tightens, enabling rates to flatten out and eventually turn north in the outer years of the forecast.  On a triangulated basis (TC2/TC14), owners are likely to see returns of US $16,498/day over the forecast period.

 

Over the next five years, we maintain our thesis that the 10-year old tanker sector is likely to exhibit the firmest price appreciation.  By 2020, we expect values for 10-year old crude tankers to be approximately 35% higher than their 2015 average prices.  Specifically in 2016, we anticipate VLCC, Suezmaxes and Aframaxes to rise by an average of 21%.  LR2s are projected to average US $37.5 million, their highest level since 2008.  LR1s and MR2s are projected to reach US $27.5 million and US $20.0 million in 2016, 21% and 9% increases from January 2016 levels.

 

Investors looking to enter the tanker markets will likely be rewarded by investing in the 10-year old segment of the market.  We estimate that a 10-year old VLCC would return investors an annualized 17% unlevered IRR if acquired at January 2016 levels and held to maturity.  On the clean side, the LR1 is projected to offer investors the best returns at just over 17% on an unlevered basis.  Suezmax and Aframax 10-year old vessels would return 13% and 14%, respectively.

 

In this year’s 2016-2020 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: