Wade Maritime Group

Growth in chemical carrier demand is being taxed by new macro-economic stresses and increasing Chinese domestic production.



Charles Lawrie
Richardson Lawrie Associates Ltd
Wade Maritime Group
Rohit Bhatia
https://www.rivieramm.com/news-content-hub/stresses-in-the-chemical-carrier-market-71081

COVID-19 Effect - Developments in the oil and Tanker Sectors

While the signs are that economies are slowly emerging from lockdown as the incidences of COVID-19 peak – or even decline - and concerns grow over the impact on social and economic welfare grow, there is still some way to go until we arrive at what might well be a new ‘normal’. Some countries are experiencing a reversal in their progress to stem the spread of the virus and restrictions on human activity may not be entirely lifted until a vaccine is found.

Such is the size of the potential hit to the world’s advanced economies that the IMF, in its’ April 2020 outlook, envisages that it will take until the fourth quarter of next year before the combined GDP of these countries will return to the level seen in the first quarter of 2019 (see below). There is a little more optimism when considering the emerging markets and developing economies.

Part of the evidence of slowly rising economic activity in China is the steady increase which has been seen in refinery utilisation levels.

The tanker market continues to ride high on the back of the increase in OPEC+ supplies in April and the rise in crude oil and petroleum products stocks held in floating storage as onshore tanks fill up, vessels are delayed awaiting ullage and cargoes remain unsold. The release of May lifting programmes – which should be a lot lower than in April – also has helped to underpin the market this week.

The OPEC+ group have pledged to cut output by 9.7 million b/d in May and June, but this will not be nearly enough to bring the market into balance any time soon, given the extent to which oil consumption has declined. From July through December the total cut would be 7.7 million b/d. In our early April short term outlook we assumed that total world oil supplies would be cut by 15 million b/d with non-OPEC sources outside of those which are a part of the OPEC+ group cutting back on production, either as the result of planned reductions or because falling crude oil prices have made some output uneconomic. Principal among them would be some of the high cost production in the USA and Canada.
Saudi Arabia has parked its tanks on the lawn by directing much of its additional April supplies at the USA market. It has been reported that at least 18 VLCCs are heading for the US Gulf. Over 30 tankers, carrying a total of 20 million bbls are reported to be located offshore California. Back in August 1985, Saudi Arabia’s crude oil production fell to 2.2 million b/d as the result of a drop in oil consumption in the 1980s and a rise in crude oil production from Alaska and the North Sea. Now the roles are reversed and Saudi Arabia is applying pressure on US producers to cut back.
In its’ April Short Term Energy Outlook (STEO) the US Energy Information Administration (eia) projected a fall in US crude oil production of 1.75 million b/d between March and October this year. We think this significantly underestimates the scale of potential cuts in US crude oil production as oil prices for WTI have fallen significantly below $20/bbl and prices for May contracts at one point turning negative.
Tight (shale) oil production is particularly vulnerable. As of early March, output was just over 8 million b/d. An estimate based on the 12 months to July 2019 made by the Baker Institute, Rice University showed 55% of all US crude oil production was accounted for by integrated majors and large cap independents. A further 18% was controlled by small cap independents while the remainder was accounted for by smaller operators, many producing less than 20,000 b/d.
While some shale oil producers have hedged output at prices which will enable them to continue operations, a significant cut in US crude oil production is inevitable. Total US crude oil production has already fallen from 13.1 million b/d in the second week of March to 12.2 million b/d as of mid April.

Meanwhile, both US crude imports and exports are on the decline. Imports in the first week of February were about 7.0 million b/d and by the middle week of April were down to 4.9 million b/d. Between the second week of March and the middle of April exports fell from 4.4 million b/d to 2.9 million b/d.

t seems a cut of at least 4 million b/d or more in US crude oil production is quite possible in the near term. If we factor in a fall in Canadian output of over 1 million b/d, cuts to production in Brazil and Norway and a further 0.2 million b/d taken off the market and put into strategic storage then it is easy to see some 15-20 million b/d taken of the market in the short term.
However even this would not stop the world effectively reaching tank tops. At the beginning of April, it was widely reported that there was around one billion bbls of spare on-land storage capacity. After the increases in OPEC+ output in April and the fall in world oil consumption, stocks are likely to rise by almost this figure. A further increase could be expected in May as the decline in oil supply is outweighed by the fall in demand. Only by June would we expect to see the beginning of a drawdown in global oil inventories.

Until then the tanker market is likely to be underpinned by the need for floating storage. While we retain the view that a crash in rates is more than likely in the near term it may not come quite as early as originally envisaged.
The enforced lockdowns around the world have enforced changes in the way we do business. We don’t need to get on a plane to attend a business meeting. Nor do many of us need to travel to the office. We have seen ‘globalisation’ fray around the edges. All of this leads us to conclude that the recovery and future growth in demand for transportation fuels may not be quite what might have been envisaged before the advent of COVID-19. The added bonus is that this would contribute towards a greener environment.

Wade Maritime organised a Gala Dinner to raise awareness for the care for the elderly and visually handicapped in Singapore.

Charity event to raise awareness for the care of the elderly and visually handicapped in Singapore.

Charity event to raise awareness for the care of the elderly and visually handicapped in Singapore.

Wade Maritime Group Gala Dinner 10th Dec 2019, Singapore

Wade Maritime Gala Dinner organised to raise awareness for elderly and visually blind - Guest of Honor, Lord Diljit Rana, MP British Parliament

Wade Maritime Gala Dinner - organised to raise awareness for elderly and visually handicapped