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Print articleIn short supply?
Oil demand growth is not enough to allay short-term tanker fears, says Clive Woodbridge
 Increase in demand are not matched on the supply side – for now |
Many of the world’s major economies are still experiencing periods of positive economic growth, and Chinese and Indian economic development in particular continues to power ahead. As a result, demand for oil is moving steadily upwards.
The International Energy Agency (IEA) in its June report revised global oil demand up to 86.1 mbd for this year, and it now projects that world demand for oil will grow by around 1.8 per cent in 2007 compared with 2006. The pace of demand growth is furthermore expected to accelerate over the next few years, averaging around 2.2 per cent annually through to 2012. For 2007, demand in the more developed OECD countries is expected to be fairly similar to 2006 and it is the non-OECD demand forecasts that are being adjusted upwards by IEA. Demand for oil in these countries is expected by the Paris-based organisation to grow by 3.7 per cent this year, to around 36.6 mbd.
The China factor
Chinese demand is now set to increase by 6.1 per cent in 2007, to roughly 7.6 mbd. In addition, Indian demand is forecast to reach 2.8 mbd in 2007, up 4.3 per cent over 2006, on the back of strong transportation fuel demand. There is no doubt that China will be a key influence on global oil markets for some time to come. Its domestic oil production is increasing by around 1.5 per cent annually, but consumption has been rising by about eight per cent a year since 2002. This has compelled China to import more oil, mainly from Saudi Arabia, Angola and Iran. In 2006 China imported 139 million tonnes of crude oil, 17 per cent more than in 2005, and a further double-digit import growth rate is anticipated in 2007 as well.
Chinese crude imports are reported to have reached a new record high in April, with seaborne crude imports jumping to 3.2 mbd, up by 25 per cent from a year before. There is no indication that the country’s oil consumption surged as dramatically, suggesting that strategic inventories were being built up over this period. China is not the only positive source of oil demand this year. In 2006, US imports of oil were down, but have bounced back strongly in 2007. With refinery utilisation now picking up and a need to replenish gasoline inventories, US crude imports have accelerated sharply, and are reported to be running around seven per cent above 2006 levels. The increase in US trade appears to have been primarily centred on long-haul VLCC routes, benefiting owners of such vessels.
Supply constraints
The increases in oil demand are not however being matched on the supply side. OPEC output increases have been fairly limited so far this year, mainly due to severe problems in Nigeria, where severe production disruptions have occurred. Overall, IEA believes that there will be no growth in supply from OPEC countries this year, with production in 2007 at 30.8 mbd, compared with 31 mbd in 2006, before possibly rising to 32.1 mbd in 2008.
Non-OPEC expansion is also anticipated to be fairly small scale, perhaps growing by just one mbd compared with 2006. However, IEA points out that Russian exports are a key driver for non- OPEC supply, with increases projected through to 2012. Looking ahead, global oil demand is expected to grow by 2.6 per cent in 2008, well up from this year’s figure. While China and India will again have a positive impact on global demand projections, the IEA believes that it is the OECD countries that will in fact be primarily responsible for the upswing next year, especially the USA and Europe.
Given these forecasts, the supply of oil relative to demand will continue to be tight, with spare capacity within the OPEC countries expected to decline to “minimal levels” by 2012. While there will be limited growth in both OPEC and non-OPEC supply, global oil product demand is expected to grow by 2.2 per cent a year on average, reaching 95.8 mbd by 2012, from 86.2 mbd in 2007. “The potential effects of a combination of low OPEC space capacity and slow non-OPEC production growth are of significant concern, all the more so when considered alongside tightness in other hydrocarbons, particularly the natural gas market,” IEA suggests.
There are plans for OPEC producers to add a net four mbd to crude capacity during 2007- 2012. However, project delays are becoming a fact of life, IEA points out, and it is sceptical that these increases will be realised in practice.
Seaborne trade to increase
On a positive note for the shipping industry, IEA suggests there will be healthy seaborne trade volumes, increasing by about three per cent a year, over the next few years. There will also be a growing reliance on Middle East Gulf supply, IEA believes, and tonne mile figures could be even higher, at 3.5 per cent.
Positive trends in the world oil market, with high volumes of oil being traded and crude prices at historically high levels as well, have in recent times helped sustain one of the best periods for the tanker industry since the 1970s. However, the tanker fleet continues to grow rapidly, expanding by around seven per cent in the past year, and this is giving rise to fears about oversupply.
Orderbook grows fast
The world tanker orderbook is huge and will remain so for some time to come, given the long lead times being quoted by yards. According to RS Platou Shipbrokers, there were a total of 1,666 tankers on order at the end of April this year, including 180 VLCCs, 127 suezmax and 290 aframax carriers. Of these ships, roughly half will be delivered in the next three years and the remainder in 2009 and beyond.
There are signs that tanker ordering activity has been slowing down, however. After averaging 20 million dwt per quarter in 2006, tanker contracting eased to 14.5 million dwt in the first quarter of 2007, and subsided further to a quarterly rate of 10.0 million dwt in the second quarter. In spite of the slowdown in ordering, the tanker orderbook still stands at a hefty 150 million dwt, or 40 per cent of the existing fleet, and it is certain that a big influx of new tonnage is going to be deployed on the global oil trading market in the coming three years.
 The fleet continues to grow |
The rapid pace of tanker fleet growth is not as yet having a negative impact on the shipping market, as time charter rates are still reasonably high, although the rates curve is flattening off compared with the past few years. In the first half of 2007, crude tanker earnings were up by around four per cent compared with 2006, says one shipbroker source. This is considered to be “not too bad”, bearing in mind that the oil trade is growing by a much smaller percentage than the tanker fleet.
Intertanko in its annual report accepts that for suezmax, aframax and VLCC tankers, there will be a big fleet build up in 2007-9, when there may well be a significant surplus. However, the organisation expects that this surplus may well be cleared away in 2010, largely due to the expected phase-out of older single-hull units.
Scrapping lags behind
As yet, older vessels are still being kept trading. According to Intertanko, sales for tanker decommissioning in 2006 were only two million dwt, the lowest since 1990. However, six VLCCs, six suezmax tankers and aframax tankers, totalling three million dwt, were sold for conversions to offshore facilities, and this kept the overall tanker fleet increase in 2006 down to seven per cent.
Intertanko points out that tanker supply for the next three years is to a great extent already decided, so there will be no “surprises”. Shipbuilding berths are generally full, which means there is only limited scope for additions. The fleet is relatively young and only 16.6 million dwt is due for phase-out over the 2007-2009 period, while almost 100 million dwt is due for delivery. There is a certainty, therefore, that the tanker fleet will grow by around 80 million dwt, and possibly more, over the next three years.
It is this high rate of newbuilding that is the greatest worry for the tanker industry at the moment, Intertanko suggests. The expansion of the oil tanker fleet will without doubt outstrip oil trade demand, and there could be negative tonne-miles considerations on top of this, as a result of shifting trading patterns. Tanker owners could be in for a rough ride in the short term, irrespective of steadily growing demand for their services from the global oil trades.
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