Tanker Opinions

The Memorial Day kickoff to the summer driving season offered hope that 2010 would see a step towards normalization of seasonal demand patterns for gasoline in the United States. Buoyed by indications of strengthening recovery in the global and domestic economies, conditions seemed poised for an uptick in gasoline demand that would mark an important milestone following the economic turbulence of recent years. As the approaching Labor Day weekend signals the end of driving season, prevailing sentiment about the economy has turned negative but the cautious hope which began the summer has been partially fulfilled.

Recent weeks have seen earnings on benchmark tanker voyages threaten to break below operating costs amid an oversupply of vessels. The specter of vessel deliveries to come and indications of a slower economic recovery have led some to conclude from this vantage point that tanker markets will struggle for the remainder of 2010. This year’s summer struggles certainly reflect the structural challenges facing the market, but it is important to keep in mind the seasonal influences which tend to drag the tanker market down during this time of year.

With the Macondo well successfully capped and the cleanup operation in the U.S. Gulf of Mexico moving into its next phase, a clearer picture of the spill’s impact on the tanker market is starting to emerge. Recent attempts to pass restructurings of U.S. energy policy and oil spill regulation have left the long-term effects of the Deepwater Horizon oil spill uncertain as Congress takes its summer vacation. In the near term, it appears that the moratorium will provide a boost to ton-mile demand as the U.S. continues its economic recovery.

Brazil’s rapidly-expanding economy has earned it a place among the developing world’s economic powerhouses, but it is the country’s burgeoning status as a crude oil exporter which has enhanced its importance to the tanker industry. Recent years of offshore crude oil discoveries could put Brazil among the world’s largest oil producers while long-term supply contracts with overseas end users make it a significant source of future ton-mile demand.

Last month, the International Energy Agency (IEA) announced that in 2009, China surpassed the United States to become the world’s largest energy consumer. Measured in combined use of crude oil, nuclear, coal, natural gas and other energy sources, China consumed 2.25 billion tons of oil equivalent in 2009, 4% more than the United States. Rather than heralding the beginning of a new era in energy, the announcement merely confirmed what has been clear for some time; China’s growth will be a central driver for the international economy in the years to come.

One can't help but notice a disconnect between slipping freight rates, weak demand fundamentals and the surge of newbuilding tanker orders seen in recent months. Asset values are derived from the expected earning of that asset over its life, but with the tanker market sending mixed signals on the pace of recovery, other forces are ostensibly in play. Recent months have seen many new orders placed at shipyards, particularly in the large crude oil tanker space. When it comes to decision making about where to place the big bucks, what has gotten into the shipowners’ psyche?

Facing a likely future of tightened environmental regulation and rising marine fuel costs, efforts are underway to standardize efficiency practices in the tanker industry. Chief among these efforts is the “Virtual Arrival” scheme developed by Intertanko and the Oil Companies International Marine Forum (OCIMF). Though not strictly speaking a slow steaming proposal, Virtual Arrival similarly encourages consensus between ship owners and ports on speed and arrival time as a way to alleviate port congestion. The proposal is a step toward formalizing efficiency practices in an industry that is likely to face greenhouse gas emissions regulation some time in the future. However, it is an initiative that will certainly take time to be fully accepted in the market.

With the enactment of a new U.S. sanctions regime earlier this month, the tanker industry has once again found itself drawn directly into the fray surrounding Iran. On July 1st, President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, imposing further restrictions on business dealings with Iran. These unilateral sanctions were designed to reinforce a new set of UN sanctions passed in June by attempting to further limit Iran’s critical need for refined product imports, highlighted in the chart below. While companies actively engaged in such trades will likely have long suspected such a tightening was forthcoming, the wide-ranging nature and stiff penalties contained within the recently-passed law warrant close attention.

 Alongside China, India has emerged as an important driver of many of the trends expected to determine the direction of future oil and tanker markets. Its rapidly-growing economy has been important in the shifting the center the oil demand growth eastward. Additionally, its export refineries have impacted both regional and international refined product trade flows. In a development likely to churn future oil and tanker markets, in late June, India moved to begin phasing out its subsidies for transportation fuels. The decision is an important step for balancing the Indian economy and may eventually provide an example for other countries looking to make similar changes in the years to come.

After threatening to follow a path that some projections showed would send it through the heart of the U.S. Gulf of Mexico, Hurricane Alex weakened into a topical depression which broke up over central Mexico this week. Alex peaked on Wednesday as a Category 2 storm which forced the temporary closure of more than 20 percent of domestic crude oil output and delayed ongoing efforts to clean and contain oil spewing from the nearby Macando well. While the storm seems to have spared the Gulf of Mexico the worst of what was feared for it, Hurricane Alex serves as a warning that the region will likely confront significant weather-related challenges before the hurricane season reaches its height in September.