28th May 2010 - More Ups And Downs Than A Disney Rollercoaster

Over the past year the Aframax crude tanker market has gone from zero (or even below zero!) to hero.  During the third quarter last year representative spot earnings for the round voyage from the North Sea to UK Cont averaged only $1,250/day, and at times were well into negative territory.  Given that fixed operating costs are around $9,000/day, this market was unsustainable.  However, back then no one expected spikes of $40,000/day in December, let alone $50,000/day in January, $70,000/day in March and then $60,000/day this month.  This illustrates the return to huge volatility in the western Aframax crude markets, covering the North Sea, Med and Caribbean.  In addition, since the end of last year the floor to earnings has been $10,000/day and so above fixed operating costs, rather than the sub-zero levels only 8 months ago.

The obvious question is "why has the market changed so much?"  In terms of the fundamentals, it is not because of short haul crude production.  North Sea output is in decline, down by 0.3 million b/d from last year; FSU crude exports out of the Black Sea and Baltic are also down by 0.3 million b/d in total, not because FSU exports are lower, but because this volume has been ‘diverted' to the Kozmino terminal on the Pacific coast.  North African crude output is unchanged, whilst the Caribbean is the only short haul market where production has increased, with Venezuela and Colombia each raising output by 0.1 million b/d over the past year.  Similarly, it is not because of tanker supply, with 43 crude Aframaxes delivered in the past 12 months and only 17 scrapped.

The market spikes have come about because of various temporary developments, such as varying delays in the Bosporus, a heavier ice season in the Baltic, congestion and ullage problems at some terminals.  More recently, the psychological fall out from the rig disaster in the US Gulf and more long haul Aframax business have supported the market.  The combination of events has meant that at times there have been few reliable open spot positions, leaving charterers chasing the market.  In addition, owners appear to be more resilient/aggressive than 12 months ago, not least because there have been these recent spikes.   Average TD7 earnings for the past 6 months have been $26,000/day; in the 6 months before this $8,500/day.  All in all, this market has been "events led" and perhaps the conclusion should be "expect the unexpected".