Over the last three years analysts have been struggling with the apparent disconnect between tanker earnings and the fundamentals which supposedly drive them. In theory when supply increases more than demand, freight rates fall. But recently the mechanics just don't seem to have worked for the tanker industry.

No Computer Needed

Look at the facts. Between 2006 and 2009 the oil trade stagnated. In 2006 the volume of oil transported was 2,668 mt, but in 2009 it was 2,642 mt, a decline of 1%. Meanwhile the active tanker fleet increased by 20% from 364.4m dwt to 433m dwt. Feed those numbers into a freight forecasting model and it will tell you to expect a slump in rates. But that is not what the real world model came up with. VLCCs have earned more than $60,000/day over the last three years and despite a few wobble's there was no sign of distress, except in products. Somehow the tanker industry has learned levitation, keeping earnings high despite deteriorating fundamentals. How do they do it?

A Singularly Good Explanation

One likely explanation is the single hull fleet. The demise of these vessels is scheduled for the anniversary date of their delivery in 2010 and on 1st February there were still 700 tankers of 51m dwt in service, 169 of them over 60,000 dwt. That sounds a lot, but dig a bit deeper, and you will find that in reality the single hull fleet is something of a mirage.

Slip Sliding Away

To illustrate what has happened, our graph plots the number of single hull fixtures over 60,000 dwt since 1996. At the outset there were over 5,000 fixtures a year, but by 2009 that had slumped to only 425 and the number of fixtures per ship had also slumped. In 2004 the average spot single hull tanker was fixed 7.2 times but by 2009 the average tanker was fixed only 2.5 times (There were 180 single hull tankers of Aframax+ and 169 of these were fixed on the spot market).

Implications for the Market

The good news for tanker supply is that the phase-out of single hull tankers has gone much faster than the declining fleet statistics suggest. If 2009 is any guide, the average single hull ship is not carrying much cargo and, by the end of last year, 80% of the single hull transport capacity which existed in 2004 had been scrapped, converted or marginalised in the charter market to such an extent that it was carrying only 2.5 cargoes a year. The 425 fixtures recorded in 2009 probably represent work for less than 50 modern ships.

Bye-bye Single Hull

So there you have it. This is supposed to be the year of the single hull phase-out, but it seems as though the market got there first. If so, the freight rate levitation of the last two or three years probably owes much to the marginalisation of the single hull fleet. Good news for environmentalists but for market analysts it means the 2010 phase-out effect could be a bit of a damp squib. Have a nice day.