Start of 2017 Looks Rocky for Asian Tankers

Asia’s crude tanker market faces the double whammy of a flood of newbuild deliveries and a cut in OPEC production in Q1 2017. On the supply side, net capacity growth is estimated to be around 5 percent for VLCCs, 9.6 percent for Suezmaxes and 7 percent for the Aframaxes/LR2 segment in 2017. At least 50 percent of the newbuild VLCCs and Suezmaxes will be delivered in Q1, worsening the oversupply of tonnage.

 

On the demand side, OPEC’s planned output cut of 1.2 mmb/d starting January will lead to less crude export cargoes with the VLCC segment bearing most of the brunt. Assuming a compliance rate of 50-60 percent, the production cut could potentially result in an average fall of 10 VLCC fixtures per month. However, the negative impact may be somewhat offset should Asian buyers turn to Atlantic Basin barrels (such as West Africa, the Caribbean and South America) as a substitute, increasing ton-mile demand. The narrowing Brent premium to Dubai swaps will also incentivize the movement of more barrels from the Atlantic Basin to Asia. Moreover, as China adopts the “National V” emissions standard this year, less sophisticated refiners are likely to favor crudes with lower sulfur content.

 

With Iran exempted from the OPEC cuts, steady cargo volumes will likely lend some support to the Suezmax market in Q1. Iranian December crude exports are expected to hit 1.88 mmb/d (up by 40 percent y-o-y), with the potential to ramp up to pre-sanctions levels of 2.2 mmb/d this year. While Nigeria’s production has been plagued by strikes, any subsequent increase may help to boost tanker demand. Libya’s crude production reached 685 kb/d at the end of December (up by 85 percent y-o-y). Should the country hit its target of 900 kb/d by the end of Q1, this may lead to an incremental increase in demand for Aframaxes.

 

While the product tanker sector in Asia is expected to see slightly lower net fleet growth compared to 2016, it faces a mixed bag of uncertainty. The LR2 tanker market will see an estimated delivery of 42 vessels this year, with a significant chunk taking place in Q1. However, the impact may be offset as around 6-9 LR2 vessels were taken for gasoil storage on short-term charters ranging from 1 to 3 months in December. Several LR2 tankers have also switched to dirty cargoes on the back of higher earnings in 2016. Around 25-30 LR1 tankers will be delivered in 2017.

 

Higher Western arb volumes as well as surging regional production are expected to dampen naphtha imports into Asia, which account for the bulk of volumes shipped along the key AG/Japan route. This will add further pressure to the large product tanker segment in Q1. Around 1.5 mmt of naphtha cargoes are expected to arrive in Asia in January, 20 percent higher than the 2016 monthly average of 1.2 mmt. The start-up of three new condensate splitters in Asia will lengthen naphtha supply in the region. Hyundai Chemical’s 110 kb/d condensate splitter in South Korea came online in November 2016 while Qatargas’ 146 kb/d Ras Laffan 2 condensate splitter started commercial operations at the end of December. Taiwan’s CPC is expected to start its new 50 kb/d Dalin condensate splitter by the end of Q1 2017.

 

The MR tanker fleet is expected to expand by around 4 percent in 2017, lower than 6 percent in 2016. Steady cargo flows from key exporters China and India may support demand for MRs, while winter heating fuel demand as well as weather delays in Q1 remain key factors to watch.