Disparate factors must converge for the market to construct and maintain a recovery in 2022, writes Tim Smith, MSI.
The search for upside in the tanker sector continues but there is reason to believe that 2022 holds the potential for persistently better earnings, provided that a number of stars align.
Spot tanker earnings provide a truer reflection of the market in 2021 than more elevated timecharter rates and with improving fundamentals in 2022 we expect to see a sharp annual improvement in spot earnings next year. However, coming from a very low base, overall earnings still reflect a market in recovery, not rude health.
To accelerate this process, clearly the global economy would need to avoid macroeconomic and financial risks, particularly around Chinese debt. The impact of Omicron would need to be benign, i.e. a variant with high transmissibility but low health impacts. This could act to override the more harmful Delta variant and accelerate the end of the pandemic.
Lastly, oil producers would need to be more generous with their output. We shouldn’t disregard the restocking potential in the market, given the major drawdowns we have seen this year. Just as destocking added further downside for oil trade flows, restocking will add upside.
Trade volumes not the only factor
Volumes of trade aren’t the only market driver in effect though. Chart 1 (left) shows indexed estimated speeds (laden and ballast) for three broad tanker classes.
We can see the significant drop in average sailing speeds in 2021, most pronounced for VLCCs which see close to 5% decline with the smaller sizes seeing around 1.0—1.5%. Given these speeds are significantly below the previous trough in 2018, there is unlikely to be much more room for further slow-steaming.
More importantly, the speed will respond to market conditions, acting to dampen the upside for tanker demand even as trade improves.
Though 2022 may see some recuperation in average speed, the Efficiency Existing Ship Index (EEXI) provides a clear reason why we could see curbs in 2023 and beyond.
At the end of November, the IMO’s Marine Environment Protection Committee (MEPC) established a Correspondence Group on Carbon Intensity Reduction to finalize and update guidelines on the previously adopted technical (EEXI) and operational Carbon Intensity Index (CII) measures.
From the perspective of market balances, these measures should be positive. EEXI will restrict speeds for some vessels (MSI is running detailed analysis on the potential effects of these measures for publication in 2022). A pause in increasing speeds is already factored into our market forecast in 2023, representing the effects of EEXI, but major declines could be countered by higher market-driven speeds resulting from improving fundamentals.
As well as speeds, we are also seeing continued high waiting times at port, although the distribution and effects of this has been more mixed geographically, and less pronounced in 2021 versus 2020.
Importantly though, despite the risks, 2022 still looks positive for tanker demand. Whilst oil demand is likely to expand by 5-6% in 2021, depending on the impact of Omicron in Q4, total tanker demand only grew by about half this rate this year, according to MSI estimates.
In 2022 we expect this to flip. Oil demand growth will decelerate to about 3%, but MSI forecasts tanker demand growth to accelerate to 4-5% as higher production volumes support markets and crude demand plays a bigger supporting role, having been largely absent this year. Add in higher scrapping which has picked up in Q4 21, and we remain constructive, albeit cautious, on market fundamentals next year.
Moreover, do not be surprised if upside volatility is linked to weaker underlying oil demand conditions in 2022, at least initially. Oil market surplus is positive for tankers and production is expected to see major increases next year.
Lower demand, alongside higher supply could push oil prices down, stimulate trade and restocking, supporting tanker market upside.