26th February 2010 - Where Is The Turning Point

A distinct characteristic of the period tanker market is that rates typically do not rise as high as spot rates and similarly, they do not fall as low as spot rates. The link between spot and one year charter rates for MR tankers is demonstrated on the graph below, although this trend has generally been repeated across all other tanker categories. The MR segment was badly hit last year, with daily earnings (tce) on the transatlantic gasoline trade falling close to zero in November 2009. However, the decline in the period market was less dramatic, with one year time charter rates at just below $10,000/day at its lowest. At present, one year time charter rates for MR tankers are slightly higher, at around $12,500/day amid a generally firmer market over the past three months.

These developments may suggest that the time charter market has bottomed out and that the worst is over. However, the industry is still facing a considerable challenge in the form of a massive orderbook, with 117.8 million dwt or nearly 29% of the existing tanker fleet (above 25,000 dwt) scheduled to be delivered over the next few years. In the MR sector alone, 7.3 million dwt or 10% of the current fleet is expected to enter the service between now and the end of this year.

Yet at the same time, prospects for global economy are improving.  The International Monetary Fund recently upgraded its world economic growth outlook to 3.9% this year and to 4.3% for 2011. Higher economic activity is expected to stimulate energy consumption, with the International Energy Agency forecasting that global oil demand will grow by 1.6 million b/d this year. This growth will come entirely from developing economies, with consumption in China and India alone rising by 0.52 million b/d in 2010. Also, the current malaise in the refining industry in the advanced economies can potentially generate lucrative opportunities for our industry, as cutting down the OECD refining capacity might lead to longer haul products trade.

These solid arguments on both sides highlight how uncertain the current environment is. To this end, any decision taken in these conditions will involve an element of risk. Nonetheless, pinpointing the turning point in the time charter market is crucial, as it offers the potential opportunity for Charterers of locking in at the most "attractive" rate.