According to the head of the International Monetary Fund (IMF) Ms Christine Lagarde, “Over the past few months, the outlook for the global economy had become increasingly worrying. There are signs that activity is slowing across both advanced and emerging market economies”. The state of the tanker market reflects the dire global situation which affects oil demand, and is also suffering the effects of too many ship deliveries and the resultant   oversupply of tankers.
Despite the struggles blighting the tanker market, the oil industry is flourishing. According to the Fortune 500, there are 10 oil and energy companies among the 20 biggest companies in the world, while the total profit of these 10 was some $237bn, or 70% of the profit of all those in the top 20. There are three US oil companies among the top 20.
The oil and energy companies are not only the biggest revenue-wise but they are also among those companies with the biggest profit, with Gazprom sitting pretty at the top with $44bn, and Exxon Mobil second with $41bn profit. The profit of Royal Dutch Shell is currently the fourth biggest in the world. (Incidentally, the company with the third biggest profit is the Industrial & Commercial Bank of China, which although it is only 54th biggest company overall, generates a profit of $32bn).
The oil companies that had the biggest profit as a percentage of their revenues were Gazprom with 28% (the 15th biggest company in Fortune 500), Petronas with 23% (68th of 500), Petrobras with 14% (23rd of 500) and Statoil with 11% (40th of 500). All of these are state-owned companies taking advantage of domestic oil reserves.
The Energy Information Agency (EIA) expects US total crude oil production to average 6.3mbd in 2012, an increase of 0.6mbd from last year, and the highest level of production since 1997. Projected US domestic crude oil production is predicted to increase to 6.7mbd in 2013, which will mean reduced oil imports and more bad news for tankers.
The International Energy Agency has said this week that rising volumes of North American and Brazilian oil supply should support non-OPEC growth of near 0.7mbd in 2013, to average 53.9mbd. This is after unplanned outages in 2011 and 2012 reduced growth to just 0.2 and 0.4mbd, respectively. OPEC natural gas liquid (NGLs) output is expected to average 6.5mbd in 2012, after growth of 0.4mbd in 2012 and a projected 0.3mbd next year.
According to OPEC, crude supply in June was close to recent highs at 31.8mbd ahead of incoming US sanctions and an EU oil embargo on Iran. The ‘call on OPEC crude and stock change’ rises to 31.2mbd in 3Q12, easing to an average of 30.5mbd during 4Q12-4Q13.
The IEA has reported that physical market fundamentals have eased since the start of the year, with an implied global stock build in 2Q12 of 2.1mbd, following hard on the heels of the 1.3mbd seen in the first quarter. Those who cite scant rationale from fundamentals for the recent fall in prices might do well to take note.
However, only 15% of the implied stock build seems to have occurred in the OECD, emphasising again the need for better data on non-OECD stock levels and floating storage. With an underlying ‘call on OPEC crude and stock change’ for 2H12 now estimated at near 31 mbd, OPEC producers may follow through on their mid-June pledge to curb output from current elevated levels if customers request less oil.
While strict adherence to the previous 30mbd quota risks a renewed and potentially damaging price surge, lower production may in any case derive from the tightening restrictions on Iran’s exports.
The situation in the VLCC market is well described by London broker BraemarSeasope in a recent report where it says that unfortunately for tanker owners, even removing a large fleet from trading [the Iranian] is having no positive effect on the freight market. Last week seemed to be the nadir, it continues, with vessels trading from the AG already running at below operating costs. That VLCC owners may be willing to dip below operating costs encouraged by some ruthless chartering, must leave them scratching their heads wondering, "Where did it all go wrong?"
BraemarSeascope suggests that at the moment there is a "perfect storm" scenario in the oil tanker market. The four horseman of the apocalypse are:
• First – a lack of oil demand in the West as the EU and US attempt to move their economies into growth.
• Second – overtonnaging, with any charterer spoilt for choice of brand new, very high quality ships – meaning that freight rates are low.
• Third – maintenance costs: the oil industry is very tightly regulated. Their inspections are frequent and deficiencies can be expensive to remedy.
• Fourth – and perhaps the most important for many companies, is refinancing debt. Large banks are already straining under the weight of bail outs and bad debt, and will be looking very closely at the balance sheets of shipping companies. As John Maynard Keynes said in 1945, "The old saying holds. Owe your banker £1,000 and you are at his mercy; owe him £1million and the position is reversed".
Source: Intertanko