Weak supply side fundamentals as well as a seasonal lull in demand are expected to plague the Asian crude tanker market in Q3 2017. The pace of newbuild deliveries continues to be relentless while scrapping remains miminal. A more worrying trend is that according to BIMCO, VLCC orders between January and May this year hit their highest level in 9 years on the back of low newbuilding prices, which could delay a potential recovery in rates. The effect of tonnage oversupply has been clearly felt in the VLCC market. Rates for the benchmark AG/ Japan route have tumbled from w97.5 at the beginning of the year to current levels of w51. Rates have been languishing at w50 to w52 for a month as the battle between handicapped (newbuilds, ex-dry dock and old) vessels and modern tonnage rages on. A recent uptick in interest for short-term time charters for floating storage failed to move rates upwards.
On the demand side, the extension of the OPEC production cuts remains a thorn in the side of the Asian VLCC market, further compounded by the seasonal summer lull. A boost in ton-mile demand due to more long-haul trades from the Americas may offer some temporary respite to falling rates. The Brent premium to WTI widened recently to around $2.50/bbl, opening the arb for US crude exports to Asia which was previously unworkable. The release of China’s second batch of crude import quotas may also lend support to its previously flagging appetite for WAF crude. It is unlikely that we will see a substantial recovery in rates before end-September, when a pick-up in winter demand takes place. While the market was counting on the upcoming IMO Ballast Water Management Convention on September 8 to raise scrapping activity, the ongoing Marine Environment Protection Committee (MEPC 71) in London is currently discussing the possibility of a partial two-year delay.
The beleaguered Suezmax sector in Asia is likely to continue to be weighed down by lower exports from Iran and Iraq in Q3. Iranian crude exports averaged 1.83 mmb/d in Q2, down by 20.5% from Q1. As reported by Reuters, Iranian crude exports in July are expected to drop by 7% m-o-m to 1.86 mmb/d. Iraq’s Basra crude exports averaged 3.22 mmb/d over Q2, down by 8.5% from December’s record high of 3.5 mmb/d. While no official July Basra program was released, loadings are expected to be lower than recent months. A potential pick-up in the WAF market on the back of higher exports from Nigeria may attract more ballasters from the East, helping to reduce the tonnage surplus. Similarly, the Asian Aframax segment is expected to remain in the doldrums due to lower exports from Kozmino. ESPO Blend exports from Kozmino are expected to fall by 2.6% from Q2 to 2.6 mmt.
Source: OFE InsightsPrevious Next