With 2009 now consigned to the annals of history, market watchers are looking eagerly to the year ahead. The struggles of 2009 for tanker owners may have caused some to forget about some of the highpoints between 2003 and 2008 – when surging tanker demand and tight supply underpinned highly profitable levels of earnings. However, today, there’s more to keep an eye on than ever…

The Fundamentals…

The fundamental economic notion of elasticity of supply and demand and its impact upon price, or specifically in this case tanker earnings, is well understood. Oil demand tends to be volatile and responds quickly to changes in economic activity among other factors. In contrast, tanker supply is much slower to respond to demand; in periods of high demand newbuild construction lead times are often long, limiting the speed of supply growth, while in periods of either declining demand or surging supply (like 2009) the decision to scrap or lay-up vessels is a complex one that cannot be taken lightly and thus takes time, resulting often in the market remaining oversupplied for longer than would otherwise be the case.

Follow The Trends…

The Graph of the Month illustrates the development in recent years of changes in crude oil tanker (in this case VLCC, Suezmax and Aframax) supply (the fleet), and dwt demand, alongside average annual crude tanker spot earnings. Changes in the supply-demand balance, not forgetting the cumulative effect, can clearly influence movements in average spot earnings.

In 2009, the tanker supply and demand fundamentals certainly came to the fore. A substantial decline in earnings came about as crude tanker demand fell on the back of receding global oil demand and crude tanker capacity grew rapidly. But in 2010, in terms of fundamentals there’s even more to follow closely…

Questions Or Answers?

Looking to 2010, owners can certainly take encouragement from the fact that IEA forecasts suggest that global oil demand will increase by 1.4m bpd relative to 2009 – reaching 86.3m bpd in 2010. This has contributed to an expected improvement in projected crude tanker dwt demand this year. Crude tanker (VLCC, Suezmax, Aframax) capacity growth is provisionally expected to be in the same ballpark (see graph), but that’s where market watchers will find clarity hard to come by.

Slower supply side growth than in 2009 will come partly on the back of expected phase-out of single hulls. But other variables including the delay and cancellation of scheduled newbuild deliveries (and potential levels of scrapping) will also be key. This may pose analysts with more questions than answers. Last year, over 25% of tanker capacity over 10,000 dwt scheduled for delivery in 2009 at the start of the year failed to enter the fleet, and it is hard to predict how things will pan out in 2010. The shipyard situation is highly dynamic but is likely to have an acute impact on supply side fundamentals. There’s more than ever to keep watch over, and that’s before one takes sentiment into account. Good luck!