McQuilling Services Releases Mid-Year Tanker Market Outlook Update

Aug. 11, 2014

McQuilling Services updated freight rate expectations for the balance of 2014 and also for the remainder of the forecast period, 2015-2018 with the following highlights:

• VLCC – A slight contraction in demand is anticipated during 2014 while tonnage supply grows only slightly.  A forecast demand growth during 2015-2018 is offset by a large number of deliveries in 2015 and 2016.  The result is a neutral freight outlook until the 2018 when some increase is anticipated, assuming new contracting is controlled.  This forecast is reduced from our January estimates in 2015 and 2016 as a result of additional supply, but may have upside potential due to market factors of supply consolidation and voyage delays.   However, recall there is still substantial “virtual” supply locked into slower transit speeds, which can and will be unlocked if freight rates improve.
   
• Suezmax – Demand growth should be slightly positive in 2014 overall, but average tonnage supply increases in 2014.  The remainder of the forecast period is neutral to positive with regard to supply.  Demand may increase more than expected if longer trades remain a feature for the Suezmax sector.  A slightly increasing, higher freight level than our January estimates is anticipated.
   
• Aframax – After posting a decline in demand in 2013, this sector looks likely to contract further in 2014.  Supply, however, also coincidently contracts in 2014 somewhat.  Going forward the net fleet growth is controlled with minimal new orders to deliver from yards yielding around 1% per annum supply growth.  The sector is subject to influence from geopolitical events and we see a high degree of volatility remaining in the rates.  In general, we see a higher increasing freight level during the forecast period.
   
• Panamax – Demand in the Panamax sector has been on a declining trend over the last several years.  In 2014, demand is expected to contract further.  Supply is slightly less in 2014 that 2013 and continues along a declining trend.  First half actual freight performance indicates a higher level for the balance of 2014, increasing through the forecast period.  This increase is a function of a niche trade where supply disruptions may create short-lived rate spikes.  If longer-haul trades emerge, the additional ton-miles will further benefit stronger rates in this sector.
   
• LR2 & LR1 – Demand growth in these sectors is anticipated to be robust going forward, as trade is transferred from the MR sectors.  Competition for market share between LR1 and LR2 tonnage will ensue.  Supply is growing significantly too, but overall, the freight effect is expected to be positive and higher than the January TMO estimates.  A substantial TCE differential currently exists between the dirty and clean Aframax/LR2 and Panamax/LR1 sectors.   At some point, this will compel owners to dirty up more LR tonnage, limiting some of this supply growth and leading to higher freight rates in the LR sectors.
   
• MR2 & MR1 – Poor fundamentals are a feature of the MR sector.  On the back of a string of high contracting years, net fleet growth is set to expand in 2015 and 2016.  Additional supply pressure comes from a large and growing IMO 2 fleet that could compete with standard MR tankers for cargoes if the chemicals market disappoints.  Demand is declining as the average trade length shortens in response to more inter-regional trade from intra-regional deployments and volumes traditionally reserved for MR tonnage are being carried more and more on LR tonnage.  Our adjusted freight outlook at mid-year 2014 is lower for the MR trades in the forecast period than our expectations in January.
   
• Asset values were broadly higher in the first half of 2014 as attention began to shift away from newbuilds to secondhand tonnage.  LR2 secondhand tonnage is specifically tracking almost 30% above where we had anticipated.  While we believe the economies of scale may help this tanker class cannibalize LR1 cargoes, we think the current values do not support the expected earnings environment and would be cautious at buying tonnage at these levels. 

For additional information, please contact McQuilling Services at +1.516.227.5700/services.us@mcquilling or visit our Products and Services page!

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