IC Market Espresso 21 Oct 2019

Strong Crude Market Could Support Rising Product Tanker Rates

When we wrote our tanker market outlook back in April, we stated that MR tanker charter rates are likely to increase during the year on the back of changing regulatory requirements and the decreasing number of vessels due to scraping and low orderbooks. Now things seem to be going in that direction with some additional support by other factors.

As a reminder, during 2017 and the better part of 2018 charter 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.

Product Tankers Could Benefit from Strong Crude Market, Again

Now U.S. sanctions on subsidiaries of vast Chinese shipping fleet Cosco in September sparked a surge in global oil shipping rates as traders scrambled to find non-blacklisted vessels to get their oil to market. The sanctions were established over allegations that the vessels were tied to illicit shipments of Iranian crude and involve about 50 tankers operated by a subsidiary of Cosco Shipping Energy Transportation, one of the world’s largest tanker owners that moves a big part of China’s oil needs. As a result, VLCC charter rates reached USD 300k per day during October, the highest since December 2007. Note that this also plays into the hand of product tanker owners since the shortage of ships to move crude oil was so acute that some shipowners switched from carrying so-called ‘clean’ or refined fuels like gasoline to ‘dirty’ cargoes that include crude oil, despite the costs of having to clean them later. As a result, one can expect fewer available product tankers if the situation on the crude market continues.

Record Low Product Tanker Orderbook as a % of Fleet

When looking at the current orderbooks one can expect a further reduction in the number of available vessels as current orderbook is at lowest levels since March 2000, measuring 7.1% of existing fleet on water. Note that this is significantly below longer term five and ten year averages of 14.1% and 17%, respectively. Furthermore, only 33 product tankers have been ordered to date this year compared to an average of 133 since 2000, making it the third lowest year for newbuilding orders.

Product Tanker Newbuilding Orders

Final Judgement

Overall, one-year MR and LR2 time charter rates have recovered from 2018 but are still below historical averages with ample room to grow given the strong supply/demand fundamentals. 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 3.9% YoY. However, the market could tighten significantly in 2020 as a result of slowing fleet growth, growing global refined product consumption and an expected increase in the demand for middle distillates from IMO 2020.

MR Average Earnings ($/day)

Supply & Demand Growth Rates (%)

AM Best Affirms A level Credit Ratings of Save Re

The rating agency affirmed the financial strength rating of Sava Re of “A” (Excellent) and its long-term issuer credit rating of “a”, both with a stable outlook.

Sava Re published a document on the Ljubljana Stock Exchange stating that rating agency AM Best affirmed the financial strength rating of Sava Re of “A” (Excellent) and its long-term issuer credit rating of “a”, both with a stable outlook.

The agency states in its release that its assessment that the balance sheet is very strong is based on the strongest level of risk-adjusted capitalization, liquid investment portfolio, prudent reserving and good internal capital generation. With the Company’s low reliance on reinsurance, sound financial flexibility and access to equity and debt markets, the agency expects the Company’s balance sheet to remain very strong in the medium term.

Furthermore, the AM Best finds that Sava Re has a track record of generating strong and stable operating results driven by sound non-life and life underwriting performance, supplemented by healthy investment income. The agency expects operating performance to remain strong over the medium term, supported by disciplined underwriting and good risk selection.

The rating agency also assesses that Sava Re’s risk management framework is appropriate for the Company’s risk profile and operational scope.

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