Crude tanker market may face lower earnings for longer than consensus — Although analysts are finally marking down their crude tanker spot earnings forecasts for 2017-18, they may be under-estimating the depth and duration of the downturn. The current market view continues to deteriorate, but it still expects earnings to remain above break-even rates, before rebounding in 2018. Our Base Case suggests that rates will slide below these levels in 2017-18 and remain near breakeven in 2019, before a recovery finally arrives in 2020.
The key market disconnect may be an over-estimation of tanker demand — Arguments from tanker owners and equity analysts that moderate oil consumption growth should support tanker demand growth of 3-5% are relying upon an extrapolation of previous relationships. As we have stressed during the past several years, oil product demand is not crude tanker demand, and a simple extrapolation of previous trends may prove painful.
Crude tanker tonne-mile demand is peaking for the next several years — Although crude tanker tonne-mile demand in 2017 may rival the peak in 1h16, demand is unlikely to return to these levels until early in the next decade. Crude trade volumes should decline after 2017, pressured by continued growth in liquids bypassing the refining system and rising domestic crude runs. Additional growth in land-based imports and a pause in eastbound Atlantic Basin exports should dampen tonne-miles.
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