Summary
The product tanker market has experienced tightening over the past few years as demand growth outpaced vessel supply introductions.
But 2024, 2025, and 2026 bring a growing number of newbuild deliveries which create a higher bar for the market to clear to continue that ongoing market tightening.
Factors influencing 2024 demand for product tankers include seasonal variations, global economic conditions, prices of refined products, inventory levels, arbitrage opportunities, and geopolitical induced trade route shifts.
Cargo docking and transmission channels at seaside ports
Crude tankers and product tankers serve two distinct segments in maritime trade. The transport of dirty crude oil takes place solely on crude tankers, while clean products from refineries (gasoline, jet fuel, diesel, naphtha, etc,) are carried on product tankers which have specially coated internal storage tanks.
Crude tankers and product tankers can transition from one trade to another if they have these specially coated tanks. This transitioning is most often found in the crude Aframax and LR2 product tankers.
Crude tankers can also carry refined products on their maiden voyages, which suggests the pace of crude tanker introductions can have an impact on demand for the existing product tanker fleet. With crude tanker introductions limited, especially among the larger VLCC class, this impact of new crude tankers siphoning cargoes from product tankers is expected to be minimal through 2025.
While crude oil and gas deposits are confined to a relatively small number of nations, refinery operations and the demand for refined products stretches across the globe.
Demand for product tanker vessels can be influenced by several factors including seasonal demand, global economic conditions which directly impacts organic demand for refined products, prices of refined products which can sway both consumption and stockpiling, inventory levels which compel restocking or destocking efforts, arbitrage opportunities based on regional price differences, ethane (carried on LPG vessels) vs naphtha (carried on product tankers) price differences which dictate substitution for cracking inputs, geopolitical induced trade route shifts, and ongoing refinery dislocation.
2023
The demand outlook for 2023 witnessed a revision in March from the original forecast of 4%-6% up to 8%-10% driven by a strong rerouting of Russian refined product cargoes following Europe's ban in February.
Initial year over year gains from this shift were quite strong, in the low double digits, which is what prompted this revision, but it was also cautioned that "those incredible cargo mile demand gains we witnessed as Russian product cargoes shifted will likely retrace a bit." Admittedly, this moving target made full year forecasting challenging from such an early point.
Clarksons Shipping Intel is reporting a 9.6% 'tonne' (cargo is used in my reports to refer to tonnes, CBM, and TEUs) mile demand increase for the full year of 2023, making the revised forecast accurate.
But cargo mile demand could have even been higher.
Rumors of greater dark fleet cargo transport, which are likely true, ate into the legitimate trade much more than anticipated, reducing the reported cargo mile totals.
This brings us back to a warning issued in 2022, as the dark fleet was developing unencumbered due to a lack of collective coordination global action:
A note to regulators and investors - a firm hand would force vessels into compliance or out of the market entirely while increasing the amount of trade being done in compliant markets (good for markets, environment, and maintaining regulatory authority). Ignoring this issue will only result in increasing harm to the market as well as a growing chance of a detrimental event attributed to this shadow fleet, which would harm shipping's reputation and introduce the likelihood of reactionary oversight across the entire playing field. Furthermore, ongoing willful disregard of the shadow fleet's existence would severely cripple any and all governmental bodies attempting to exercise control over the legitimate global fleet, from an environmental or geopolitical standpoint.
Turning to vessel supply, it was anticipated that fleet growth would come in at a very low 0.3% with slightly higher slippage rates and average capacity retirements contributing to those expectations.
Slippage projections were only slightly off, however, the strong market reduced vessel retirements by approximately 1 million dwt.
(This was admittedly a miss, which is quite odd since the demand side is typically the toughest to predict.)
Incorrect retirement projections contributed to about 90% of the difference between 2023's anticipated supply growth and actual results. Therefore, expectations for 2024 retirements will utilize 2023's results as a guide, which should reflect strengthening market conditions more accurately.
What to Watch
2024's forecast will be influenced by five main factors; ongoing rerouting due to the situation in the Red Sea/Gulf of Aden, attempts to address the shadow/dark fleet along with sanctioned Russian product flows, the political resolve European nations continue to display regarding the ban on Russian refined products, how targeting of Russian oil and gas facilities by Ukraine might eat into available export volumes, and (of course) economic growth in importing regions.
Of these issues, the situation in the Red Sea/Gulf of Aden brings the highest probability of impacting the market while also presenting the potential for the greatest volatility over the course of the year.
Red Sea
Back in December, a report examining the Suez Canal Impact on Tanker Markets was published and is recommended reading to gain a proper understanding of how this situation will result in different outcomes for crude and product tankers.
Suez Canal crossings have declined down to 32 transits per week, representing a nearly 50% drop from 2023's average of 59.37 transits per week.
Source: Data Clarksons Shipping Intel - Chart by VIE
In our Product Tanker outlook for 2023, we noted that LR2 vessels would be most impacted by a European ban on Russian refined products. This is because those exports would originate on Russia's western ports and then have to traverse back to Asia (a long haul favoring larger vessels) where their new customer base was forming. This meant the Suez Canal would be vital artery for the expanding LR2 trade.
Our Tanker Analysis of The Suez Canal showed that LR2 vessels would again be the most impacted among the fleet with these newly rerouted Russia to Asia trade now having to sail around the Cape of Good Hope.
This has placed a major emphasis on the LR fleet as longer hauls become more common and a premium is placed on maximizing economies of scale, suggesting that spot rate and time charter increases will be the most pronounced for those classes.
During the initial stages of the escalating situation, it was unclear if Russian vessels would get a pass from Iranian backed Houthi rebels, since Russian and Iran are on fairly amicable terms. But a recent attack on a product tanker with Russian naphtha cargo seems to suggest Russia is not immune, prompting many Russian affiliated vessels to take the longer route around the COGH.
The rerouting around the COGH presents a significant additional distance for any Europe/Asia (and vice-versa) cargo. But, cargo volume expectations should be adjusted to account for demand destruction as a result of higher freight rates, shifts to air/rail transport, fungible products (like diesel, gasoline, jet fuel, etc.) being obtained from what would now be relatively shorter distances utilizing different shipping routes, market substitutions - think naphtha to ethane switching, all of which will curtail volumes that would have potentially utilized the Suez.
After those adjustments are made, this current level of rerouting, if maintained throughout the entire year, could add an additional 7.12% in cargo mile demand on to expected organic demand growth.
Russia
Three of the five areas to watch involved Russia in some aspect, so let's briefly discuss the situation there.
Increasing scrutiny of entities helping Russia evade price cap restrictions has now resulted in the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) taking its second price cap enforcement action of 2024, resulting in sanctions.
Recall, the existence of a shadow fleet (the facilitation of illicit trade by old tankers owned/operated through third parties as it avoided the price cap) reduces utilization of compliant/legitimate tankers in the oil trade.
The enforcement of these sanctions ideally would reduce the propensity to engage in illicit trade and result in some cargoes previously being carried by the shadow fleet to shift over to compliant vessels, which would have a positive impact on cargo mile demand IF Russian export volumes are not reduced.
With Ukraine now targeting oil and gas facilities in Russia while sanctions may make it more difficult to repair and or service/maintain existing refineries, there has been speculation that Russia may experience a drop in refined product export availability.
So far, that has not been the case as S&P Global notes that export volumes remained relatively stable through the month of January.
Source: S&P Global
There are better charts to use to show this fact, however, the chart above links to a detailed and very interesting graphic animation which shows the development of trade routes and ship-to-ship transfers (inferred) before and after the Russia/Ukraine war for both refined products and crude oil.
Regarding the StS transfers, recall, Türkiye's location on the Black Sea's southern shore and Russian export facilities which are located on the eastern shore of the Black Sea.
The slow degradation of Russian refinery facilities coupled with Ukraine's limited and targeted attacks which have so far had little impact on Russia's overall export abilities, do not appear to present a strong enough combination to alter current volumes in the short to medium-run in a meaningful way.
However, any significant attacks by Ukraine on Russian port facilities, or infrastructure closely aligned with facilitating exports, could be the event that would trigger a meaningful change in Russian cargo volumes. This makes monitoring the expansion of the war on this particular front important to the tanker market in general.
Demand
Organic demand in key import epicenters was the last of five factors to watch in 2024, and will be discussed here along with other demand side considerations.
Perhaps with the exception of China (which is still expected to experience growth) and a couple other developed regions (looking at Japan and the UK which haven't been contributing much to product tanker demand growth lately anyway), the global economy appears collectively well positioned. Increasing wages, declining inflation, and strong consumption all tend to encourage stronger manufacturing/industrial activity as well as demand for services which feeds into all aspects of refined product demand.
This still-tenuous global economic recovery will soon enjoy further support as the ability of Central Banks to safely drop interest rates toward the end of the year (once lingering impacts of the previous inflationary scare lose their ability to reignite into legacy trends akin to the 1970s) provides a central bank 'put' which has not been available in over 15 years.
A gradually more hospitable environment is expected to translate into increasing import demand in key regions like N. America, Europe, Asia, and Latin America. However, this should be balanced against likely declines in Africa and the MEG, driven by the opening of several new refineries in those regions. In January, Nigeria commenced operations at what is now Africa's largest refinery with plans to complete additional projects this year. The MEG region is projecting a 3.79% increase in their own refining capacity in 2024, which follows a 5.5% gain in 2023.
Taking these gains and declines into consideration, we are left with expectations of 2.9% seaborne refined product volume demand growth in 2024. That volume growth should translate into approximately 3.78% cargo mile demand growth.
China
Let's briefly address China's lackluster economy and how that might influence the refined product market. China is now a net exporter of refined products and that trend is expected to continue as 2024 will be marked by further expansion in refinery capacity.
Muted domestic demand and expanding supply will likely result in greater export quotas allowing more Chinese refined product to hit the global market. That additional supply will likely impact prices at a time where robust global demand may be trying to send those prices higher.
This is a complimentary situation where foreign markets are keeping demand for Chinese products high which supports China's domestic economy, while the addition of Chinese products to the global market keeps prices low for those foreign markets which otherwise might have to endure the higher prices of refined products which accompanies economic growth.
Typically, energy prices are some of the most inflation sensitive during bull markets. But price capped Russian oil and China's growing exports could provide a means to partially combat that correlation which could work to mitigate inflationary concerns.
In 2024, refined product volumes available for export ("for export" implies removing refining capacity gains which are assumed for domestic consumption) could increase by as much as 3.2% in 2024, with China alone accounting for 2% of that figure.
Therefore, the dynamic described above and China's contribution to available export volumes in 2024, make refined product supply out of China a key factor in influencing global market demand and prices.
Ideally, it's expected that China will make the most out of their newly minted refineries (and PDH plants) in an effort to support their economy in 2024 which would foster a more hospitable demand environment.
Since China utilizes the MR fleet extensively for its intra-Asia exports, this dynamic is also expected to benefit those classes (MR1 and MR2).
Prices
Circling back, we noted above that high refined product output could impact prices, so let's explore that as it relates to vessel demand. The above discussion notes a slight difference in expected seaborne demand volumes rising by 2.9% and possible export volumes growing by 3.2%. Let's also acknowledge China's greater propensity to produce more and raise quotas.
If these predictions come to fruition, volume production can meet or exceed demand which would keep refined product prices in check, perhaps even establishing a temporary ceiling even as the economy continues to grow.
Keeping refined prices in check, especially during times of heightened economic growth will likely facilitate heightened organic demand, induce greater swing demand, and lead to greater stockpiling, all off which add up to greater vessel utilization.
Those first two demand factors should be obvious, as stable input prices and a growing economy would increase profitability thereby inducing this heightened demand for refined products.
The third, greater stockpiling, won't be the result of current price action, but rather the realization that sustained economic growth and stable input prices, like refined products, are a temporary condition.
This dynamic is set to unfold as global distillate inventories are considerably low in key regions like the US, Europe, and Singapore.
Source: EIA
Source: @JKempEnergy
Low inventories and expectations (and especially the realization) of climbing prices are likely to help contribute to another year of healthy arbitrage, especially for diesel cargoes which should experience greater demand in H2 of 2024 due to regional structural shortages and stronger anticipated economic growth in Europe, Latin America, Africa, and Asia.
Bottom Line
The Red Sea situation makes it difficult to cite a precise cargo mile demand gain percentage, since we do not know the exact date the conflict will be resolved and vessel traffic will return to previous levels. So, in these reports, we are continuing to cite H2 as that turning point until further clarity is gained.
Therefore, organic cargo mile demand growth combined with H1 rerouting provides us with a very conservative 7.32% cargo mile demand growth in 2024. Should the Red Sea situation be resolved sooner, or drag on longer, this estimate would need to be adjusted accordingly.
Supply
Expectations of a 7.32% cargo mile demand increase in 2024 absolutely eclipse anticipated net vessel supply introductions of 2.22%, a figure arrived upon after accounting for limited retirements and minimal slippage.
This 5.1% divergence between supply and demand suggest market tightening, a condition which has now persisted since 2021. Recall that ongoing market tightening presents a more acute impact on spot and time charter rates the further the market moves from equilibrium.
The supply side for product tankers is relatively straightforward consisting of a limited orderbook, little potential for retirements, and ongoing asset price increases supported by increasing spot/TC rates due to a structurally tightening market. However, it's this type of environment that can foster unhealthy levels of newbuild orders, which should be monitored.
2024's delivery schedule consists of 106 vessels, 10 of which have already been delivered.
Source: Value Investor's Edge
Including the orderbook, these expected deliveries equate to 2.96% of the current and eventual fleet, which represents a figure that was easily absorbed by previous markets.
Source: Value Investor's Edge
While the chart above shows decent retirement potential with 15.12% of the fleet above 20-years of age, 2023's market represented a major divergence from previous retirement trends, with the average age at demolition jumping from about 24-years in 2021 and 2022, to 31.29-years in 2023.
Source: Value Investor's Edge
This jump in average age was due to owners wishing to maintain as much tonnage on the water as possible during a high utilization and consequently high rate environment.
The CII (Carbon Intensity Indicator) threatens to remove a number of vessels, though it failed to do so in 2023. But 2024 may have a bit more impact as corrective plans are now required to be submitted and fulfilled for vessels falling into the E category.
Source: Data from VesselsValue - Chart by VIE
In total, 508 vessels have now fallen into this undesirable ranking, with many of them being in the 15-year old and above age range.
However, a highly profitable environment makes it more likely that investment toward CII compliance can be economically justified which suggests many of these vessels could remain on the water in 2024, keeping total retirements in the single digits and well below 0.5m dwt.
But with finite investment capital owners face a choice between upgrading a vintage vessel vs. purchasing a new one. Remember, increasingly stringent requirements of the CII on an annual basis could allow compliance to be achieved relatively easy at first compared to what may need to be done several years down the road for those vintage vessels.
Newbuild orders hit the second highest total in a decade in 2023, and 2024 is off to a brisk start. With 20 orders already inked, the current pace would result in about 162 vessels ordered this year (about 40 more than I personally would like to see).
Source: Value Investor's Edge
Fortunately, the LR2 class has witnessed a dramatic slowing of ordering while newbuild prices continue to rise, up almost 50% compared to just three-years ago.
Source: Value Investor's Edge
The LR2 class is among the largest product tankers (LR3s are the largest, and equivelent to a Suezmax in size, but only number 23 with zero newbuilds on order) which makes waning LR2 newbuild orders especially relevant in terms of future capacity introductions for the entire fleet.
LR1s are also fairly limited in number, consist of older vessels for the most part and have witnessed zero newbuild orders as well in 2024 following a rare series of orders in 2023.
This means 2024 is not only experiencing a lower number of orders, but they are for smaller vessels (confined to the MR classes) which will limit future capacity growth in 2026 and 2027 - the years when these orders are being scheduled for delivery.
Ideally, this suggests that the cyclical introduction of new product tanker tonnage will peak in 2025. This peak represents very manageable introductions in vessel capacity which should be absorbed under typical market conditions.
Therefore, 2025's supply introductions may slow the overall market tightening trend but it likely will not halt it. The bottom line is the product tanker market could still experience several more favorable years if newbuild orders pull back to more manageable levels while the demand side holds up its end of the bargain.
Conclusion
Strong economic growth in key importing regions will provide the base for ongoing market strength, punctuated by increasing long hauls and a thin orderbook.
Complimentary supply and demand sides will lead to continuing market tightening which should foster higher average spot and time charter rates while contributing to increasing asset values.
There are several factors to monitor in 2024, chief among them being the situation in the Red Sea which will raise cargo mile demand expectations the longer it continues. If approximately 50% of the fleet continues to avoid the Suez Canal and the Red Sea, opting to go around the Cape of Good Hope throughout all of 2024, it would contribute approximately 7.12% to cargo mile demand.
Organic cargo mile demand growth in 2024 is expected to come in at 3.78% driven by strengthening economic growth in key importing regions.
Though Red Sea rerouting timelines are unceartain, we are citing H2 as a return to normal. Therefore, organic cargo mile demand growth combined with H1 rerouting provides us with a very conservative 7.32% cargo mile demand growth in 2024.
Liberal net supply side predictions of 2.22% fall well short of those very conservative 7.32% cargo mile demand gains, suggesting further market tightening in 2024 which will likely propel spot rates, time charters, and asset values even higher.
2025 appears to represent the cyclical peak for vessel deliveries in terms of capacity. Newbuild orders for larger LR2s have dropped off while MR orders are only considered slightly elevated relative to its existing orderbook and age of the fleet.
If 2025 is the cyclical supply side hurdle which the market must inevitably deal with and overcome, it presents one of the lowest bars possible leading to the strong probability of an ongoing tight market for several more years.
However, in order for that long-term forecast to materialize owners must bring newbuild ordering down to more reasonable levels, Europe must sustain its resolve to shun Russian cargoes, all while the global economy maintains a strong backdrop for refined product demand.
Product tankers write up- souirce VIE
Re: Product tankers write up- souirce VIE
Just as the gassers need to stop drilling and slow production, these guys need to slow down building ships.