Tanker Shipping Demand Nightmare – Fact Of Fiction?
The "Freddy Krueger" scenario for the crude oil and product tanker owners has always been lower global demand growth, whether via some worldwide economic collapse or a game-changing cost breakthrough for non-fossil fuels.
Smaller-scale, albeit very real fears on future demand are now rising.
The investor pitch for tanker equities in 2019 is that capacity growth is slowing just as the IMO 2020 rule – which will cap marine fuel and emission sulfur content – is nigh.
The regulation is expected to raise fuel costs, lower average ship speed, reduce effective vessel supply and increase demand for both crude and product transport – all else being equal.
But that ‘all else being equal' caveat is looming larger after a string of bearish reports on oil demand over the past week.
Barrage of warnings
On July 9, the U.S. Energy Information Administration (EIA) cut its estimate for 2019 global oil consumption for the sixth month in a row, and emphasized that demand growth in China is increasingly shifting towards natural gas liquids (NGLs), which are carried on liquefied petroleum gas tankers, and "away from transportation fuels such as gasoline and diesel," which are carried on conventional tankers.
If not for new NGL flowing to petrochemical plants, the EIA said China's liquid fuel demand growth in 2019 would be at low levels not seen since 2008.
On July 11, OPEC released its 2020 outlook, projecting that demand for OPEC crude would fall by 1.3 million barrels per day (b/d) or 4 percent year-on-year. It said that an extension of production cuts until March 31, 2020 was necessary to "avoid a destabilizing build-up of oil inventories."
On July 12, the International Energy Agency (IEA) dubbed demand growth in the first half of this year "exceptionally weak." It predicted that demand for OPEC crude oil in the first quarter of next year would "plunge" to a level not seen in 17 years.
Importantly for tanker markets, the IEA said that weak demand has pushed inventory stockpiles above the five-year average, implying that "any rebalancing [of supply and demand] seems to have moved further in the future." Stockpiles are the bane of tanker demand; if there's crude or products in storage, you don't need to ship as much in by sea.
Peak oil demand
In a new research note to clients, Stifel shipping analyst Ben Nolan warned, "There should be some help from IMO 2020 related to consumption growth, but beyond this one-time event, it does appear as though there may be structural issues with consumption growth."
One of those structural issues, he said, "is natural gas, which is eating into oil demand in developing economies and Europe. Should natural gas and NGLs remain inexpensive, the pace of fuel switching could accelerate."
Nolan cited the once popular idea of ‘peak oil,' which originally referred to the supply-side theory that the world would soon run out of oil. Peak oil supply is not happening anytime in the near or medium term given resources tapped with new technologies in countries such as the U.S., but the idea of peak oil demand is still very much alive.
"While the market is still at least several years away from peak oil demand, and markets like China continue to grow at more than 300,000 b/d, the idea of oil consumption falling is certainly on the horizon, and we suspect sooner rather than later," said Nolan, who added, "Peak oil lurks like a monster in the shadows."
"Longer term, this is likely to have a negative impact on the tanker markets," he cautioned. "If absolute consumption is falling, the constant growth of the fleet size is no longer needed, particularly in the crude tanker business, which is also subject to cannibalization by product tankers....