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The tanker market has gone through some major shifts in demand and fundamentals in the past few months, as a result of the pandemic and its effect on crude oil demand. However, as the contango plays which emanated from this, start to fade, a return to the market’s fundamentals is bound to shift tanker demand to more normal plays.
In its latest weekly report, shipbroker Gibson said that “anyone who has worked in the tanker market for the last decade will be familiar with the story about the demise of old refineries in Europe in the face of stiff competition from newer, more efficient facilities in the East and the United States. Yet, in the last oil price crash (2014-2016), refineries in Europe had somewhat of a renaissance as lower prices boosted margins, and the story, which many product tanker owners used to beat the drum with investors, never fully materialised. Now, during the current price crash, the same old story has once again re-emerged – refinery rationalisation in Europe. But why, during this price crash, are analysts talking about the opposite outcome? Should this time really be any different?”
“Well, yes. The last oil price crash (2014-2016) was supply driven when OPEC and the United States engaged in a supply war. This price collapse has been demand driven. Looking ahead, it will be the evolution of demand, coupled with rising utilisation rates that will dictate global refining margins. In ordinary times, weaker margins might prompt renewed investment in plant upgrades, but given the scale of the financial shock across the energy space, the weakest refineries could finally throw in the towel. Many of these are in Europe (although not exclusively)”, said Gibson.
According to the shipbroker, “in the short term, there will be a delicate balance between regional refiners increasing runs in response to a rapidly evolving demand picture whilst also seeking to protect margins. To what level of utilisation refineries can sustain remains uncertain. Any increase in product prices in Europe will draw distillate cargoes from Middle East and United States, where stocks are at 10-year highs, keeping margins and utilisation under pressure”.
The shipbroker added that “looking forward, over the next 5 years planned refinery capacity additions exceed demand growth. East of Suez, refinery capacity is expected to increase by 4.6mbd, whereas in the West, it is expected to increase by just 1.7mbd, with additions in Africa and the US accounting for most of the new capacity. However, despite rising capacity in the West, utilisation is expected to grow just 700kbd by 2025 (from 2019 levels), versus growth of 4.1mbd in the East. Quite simply, even with pre-Covid-19 demand projections, there is not enough room for everyone. Indeed, a recent forecast by consultancy IHSMarkit suggests that European plants could lose 2mbd of capacity over the next 5 years. This may seem aggressive, but with the competitive pressure increasing, at least some capacity will have to close or be repurposed. Less sophisticated refineries on the US East Coast may also be at risk”.
Gibson concluded that “regardless of any potential rationalisation, Europe will remain a significant refining centre, with a large baseload of capacity to service local and export demand. Increasingly, however, it will find stronger competition both in domestic and overseas markets. Increased volumes of products from the East will support the tonne mile story, but this is likely to continue as an evolution, not a revolution”.