By Ilias M. Lalaounis
As everyone anticipated the results of the OPEC + G20 meeting last week, it was very interesting to watch the reaction of tanker rates that were in a bull run lately. Amidst an oversupplied oil market and expectations of production cuts and consequent oil price hikes, the large contango effect has made profitable several storage plays during the past couple of months, occupying a lot of ships as a result, while in addition to that, several countries decided (amid bottoming oil prices and the Coronavirus pandemic emergency) to increase to the maximum their strategic petroleum reserves (e.g. the US SPR already has 634 million barrels in storage vs. a total capacity of 713 million barrels).
Key stakeholders in the industry created an additional hype by characterizing this meeting as one of the most important and historic events in the last two decades, creating expectations that any deal would lead to a further spike in short-term activity. There were of course also some less optimistic voices in the industry insisting that deal or no-deal the tanker market remained fundamentally weak in the long term, with the pandemic restrictive measures around the world already leading to a 25-35 million b/d or 30% decrease in demand. Following the end of the meeting, OPEC+ announced output cuts of 9.7m b/d for May and June, 8m b/d for the remainder of 2020 and 6 million b/d for the period January 2021-April 2022. The record cuts we are about to witness in the next couple of months are almost equal to 10% of global supply, while together with non-OPEC+ member cuts the figure could even reach the equivalent of 1/5 of global supply.
This means that May onwards cargo loadings will definitely see significant declines and this will most likely have a negative impact on the tanker freight market. Because of this expectation, we could possibly see producing countries trying to pump out as much product as possible before the agreement enters into effect, which could offer some support to the tanker market before we reach May 1st.
Looking further ahead and as “expecting the unexpected” is something everyone must have gotten used to by now, I’d say that there are a few possible scenarios in which neither the oil market dries up, nor prices manage to stabilize at much higher levels and push freights down. We have seen many times during previous output cuts that there have been some non-compliant members and we won’t be surprised to see certain producing countries eventually ramping up production above what was agreed this time as well.
Not only would such a development restore part of the cargoes lost, but it would also cause great dissatisfaction to compliant members that would start losing market share due to non-compliance and this could eventually lead to a new price war as a result. In addition to that, global demand for oil will gradually begin to increase as countries around the world eventually start to exit the pandemic emergency state and return to normality, while let’s not forget the amount of tonnage that has been used for storage and will not be competing for business in the tanker market.
Chartering (Wet: Soft-/ Dry: Stable+)
Similar to the week prior, the dry bulk market kept moving up on the back of meaningful improvements on the Capesize front, while rates for the smaller sizes recorded further losses. The BDI today (14/04/2020) closed at 679 points, up by 44 points compared to Monday’s (13/04/2020) levels and increased by 83 points when compared to previous Tuesday’s closing (07/04/2020). Crude carrier rates started coming off their highs as talks between OPEC+ members were intensifying, with most routes noting losses before the weekend when the final announcement were made. The BDTI today (14/04/2020) closed at 1,108, decreased by 14 points and the BCTI at 818, a decrease of 9 points compared to previous Tuesday’s (07/04/2020) levels.
Sale & Purchase (Wet: Soft-/ Dry: Soft-)
The almost non-existent activity on the SnP front is evidence of the uncertainty that continues to prevail across all sectors, while as the gap between Sellers’ and Buyers’ ideas remains fairly wide in most cases, we expect the market for the remainder of April to be equally quiet. In the tanker sector we had the sale of the “ADVANTAGE SKY” (156,644dwt-blt ‘10, China), which was sold to UK based owner, Hayfin, for a price in the region of $18.8m, while no sales were confirmed as far as dry bulk candidates are concerned.
Newbuilding (Wet: Soft-/ Dry: Soft-)
With a big cloud of uncertainty in regards to when shipbuilding demand could return into healthier volumes still casting its shadow over the shipbuilding industry, appetite for ordering remains very limited, while given the fact that it usually takes at least a few weeks between the time an order is placed and the time it is confirmed, it is only recently that reported activity volumes have started to accurately reflect the negative impact of the pandemic on contracting. Having said that, preliminary data for the first quarter of 2020 is already evidencing the fact that appetite for ordering has shifted to a lower gear this year, with a 61% decrease overall being recorded compared to Q1 2019, while the slowdown in dry bulk and tanker contracting is estimated at around 62% and 55% respectively. In terms of recently reported deals, Malaysian owner, AET, placed an order for two firm VLCC crude carriers (300,000 dwt) at Samsung, in South Korea for a price in the region of $105.0m each and delivery set in 2022.
Demolition (Wet: Soft-/ Dry: Soft-)
Wish cash buyers across all key demo destinations restricted by the respective national lockdowns currently in place, sentiment across the market remained particularly soft for yet another week. To make things even worse, further extensions were announced as last week came to an end, with the government in Bangladesh prolonging the present restrictions until April 25 and neighboring India stretching its nationwide lockdown even further to the end of the month. This means that the limbo the shipbreaking industry is currently in, will probably extend well into the beginning of the summer season, as even in the good scenario, which includes an exit from these lockdowns on the aforementioned dates with no additional extensions being imposed, it will take at least a few more weeks until specific operational issues are dealt with and the market finds its usual pace again.
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