The product tanker market has experienced a rough couple of years with low charter rates slicing the industry’s profitability, however things seem to be improving. That is why, in today’s blog, we bring you some key trends which will shape the industry in 2019.

The Market in 2018

It is no secret that the product tanker market has been struggling for years as rising costs were repeatedly faced with decreasing charter rates.  This was clearly seen in 2017 and the better part of 2018 when rates fell below the historical average. However, the product tanker market picked up in the fourth quarter of 2018, partially reversing the downward trend observed in the first nine months of the year. The beginning of the quarter was weak in line with the previous quarters, as rates hovered close to historically low levels, but the market gained momentum from early November onwards. The increase in rates was partly due to a surge in crude tanker rates, which had a positive effect on product tankers, with a high number of LR2 vessels shifting from clean trade to dirty products or crude and therefore, reducing tonnage availability in the product tanker market. In addition, the stronger crude market significantly reduced cargo poaching by newbuilding crude tankers on clean routes. Aside from the positive spill over effects from the crude market, the product tanker market was boosted by seasonally stronger demand due to increased heating oil consumption, while adverse weather conditions reduced tonnage availability. Furthermore, refinery outages in Brazil and Mexico required substantial volumes to be moved with product tankers to meet demand, which contributed to the positive trend.

Source: Morgan Stanley

IMO 2020

An important factor to consider in the upcoming period for the product tanker market is the introduction of the IMO 2020. The IMO 2020 is a regulatory requirement set by the International Maritime Organisation which mandates ships to emit less sulphur dioxide by only using fuel oil with less than 0.5% sulphur content (vs 3.5% currently). Note that the regulation was initially introduced back in 2016, however its implementation was postponed.

In order to reduce the sulphur content to the required amount, shipowners will have to decide between:

• Installing a scrubber to enable the vessel to burn HSFO
• Paying the premium to consume compliant fuels with a sulphur content <0.5% (MGO and LSFO Blends)
• Use LNG as bunker fuel

Among the options which are available, the installation of a scrubber is the least expensive one. Moreover, scrubbers’ favour larger vessels that consume more fuel and have trading patterns consisting of more time at sea.

Yet some feel that the new regulation might have a positive effect on the tanker market. For instance, one could expect an increase in crude tanker trade due to increased refinery utilization and throughput in order to produce more low-sulphur fuels. Furthermore, it could lead to an increase in clean tanker trade due to the increased production of low-sulphur fuel and the need to deliver these fuels to global bunker markets. Finally, it would lead to a higher floating storage demand for both clean products (building inventories of low-sulphur fuel prior to 2020) and dirty products (a need to store excess fuel oil post-2020).

Supply & Demand

On the supply side, 2018 saw a decrease in deliveries of product tankers, coupled with a record high number of scrapings. This helped to shrink the fleet overcapacity which had a negative effect on rates and profitability. Looking forward, the expected growth rate for 2019 is set at 3.3% YoY.

Supply & Demand Growth Rates (%)

Source: Scorpio Tankers

According to Lloyd’s List, the strength of US Gulf exports of gasoline and middle distillates will continue to provide a floor to freight rates for the global fleet of MR tankers. Latin American countries are establishing and expanding gasoline and diesel trade routes thanks to record refinery runs in the US, fuelled by access to cheap domestic shale crude. Refinery outages and under-utilisation that have dragged refinery output lower in Mexico and Brazil in particular, underpin these rising shipments, rather than increasing demand for refined products. Note that the market has also been witnessing an increase in tonne-miles as a result of expanding refinery capacities in Saudi Arabia and the United Arab Emirates.

To see how the described market conditions impacted the results of Croatian shippers (Tankerska Next Generation), click here