As we enter Q2 2017, Asia’s crude tanker market finds itself flooded with a flurry of newbuilds that hit the water over the last quarter. According to Lloyd’s List Intelligence, new tonnage delivered hit 15m dwt in Q1 and is expected to stand at 8.7m dwt in Q2. The gradual but steady unwinding of floating storage in global hotspots due to a flattening Brent futures curve is likely to release a constant stream of tonnage into the market, exacerbating the situation of oversupply.
The negative impact of unusually heavy refinery turnarounds in Asia as well as OPEC production cuts seems to have been offset by increased ton-mile demand from a surge in long-haul shipments, which has put a floor under tanker spot rates. Around 2.6 mmb/d of Asian refining capacity is expected to be offline in April (up by 87% y-o-y), before easing to 2.1 mmb/d in May and 974 kb/d in June.
According to a Platts Survey, OPEC compliance has been robust, averaging 115% over January to March. Amidst such bearish factors, a recent spike in long-haul trades from the Americas has provided a much-needed boost to the Asian VLCC market. Around 27 VLCCs are headed to Asia in April, with not all cargoes confirmed. Of the 27 VLCCs, 11 are exCaribs, 7 ex-Brazil, 3 ex-Uruguay, 3 ex-USGC, 2 ex-Venezuela and the remaining from Mexico. While such arbitrage trades remain dependent on crude price spreads, Asian buyers are expected to continue turning to sources from afar to make up the supply shortfall from the OPEC production cuts.
We might see some recovery in VLCC rates at the end of Q2 as peak turnaround season comes to an end and a slowdown in newbuild deliveries takes place. Lower cargo flows from Iran and Iraq are expected to add downwards pressure to the Suezmax market in Q2. Iraq has been steadily trimming its crude exports in accordance with its pledged production cuts. Iraqi crude exports averaged 3.33 mmb/d in Q1, down by 5.2% from December’s record high of 3.5 mmb/d. While Iran is exempt from the OPEC output cuts, it has been grappling with raising crude exports due to sharp drawdowns of floating storage as well as depleting mature oil fields according to Thomson Reuters Oil Research. A relatively weaker VLCC segment is also likely to put a lid on further growth in Suezmax rates as it is currently around $3.67/T cheaper to load cargoes on VLCCs. The Asian Aframax segment may find some support from growing exports from Kozmino which are expected to expand by 10.2% from Q1 to 655.5 kb/d in Q2.
With ADNOC’s 127 kb/d RFCC unit at Ruwais out of commission until 1Q 2018 as reported by Reuters, increasing fuel oil flows out of the AG may lead to an incremental increase in demand for Aframaxes. In recent months, ADNOC has been exporting on average 4 to 5 Aframaxes of fuel oil from Ruwais per month since the shutdown of the RFCC unit.
Source: OFE Insights