Over the past two years, the world has witnessed the advent of what some call the ‘new oil order’. Emerging oil producers, varying break even prices and the fight for market share have caused the deepest price drop since 2008 and heightened volatility.
As a consequence, strong refinery utilisation and the resulting stress on the system, both in terms of distribution and storage of refined products, have given product tanker markets a significant boost.
However, well beyond the price of oil, there are several other powerful fundamentals coming into play which are expected to continue driving product ton-mile demand for many years to come. Global refinery capacity is estimated to increase by an average of 7.7 million barrels per day (mb/d) over the next five years. Most of this new capacity is export-oriented and will increase the already visible trend of refining hubs being ‘dislocated’ from their main consumers, thereby making the case for continued product tanker demand.
New and developing large scale refineries, primarily in the Middle East and Asia, will continue to seek out markets globally. In competition with Middle East refiners, Chinese exports have also gained considerable momentum, expected at 250,000 barrels ofoil per day (kb/d) in 2016 – up 70% from the previous year. In addition, US Gulf refiners, supported by the shale revolution, have the strategic advantage of cheap feedstock and low energy cost and will continue to export product.
Meanwhile, a recent study suggested that only 12 of 34 refineries presently operating in North-West Europe have ‘must-run’ status, which over time would further increase import demand on the continent, possibly up to 60% of overall product demand in the region. A number of Australian refiners have already shut down in past years due to competitive pressures, thereby causing total petroleum imports to increase steadily over the past years (7-13% p.a.). Meanwhile, South America and Africa continue to import products on long haul trades due to insufficient domestic refining capabilities.
In addition to these structural changes, geographic price arbitrage generates ever evolving trade lanes and infinite triangulation opportunities. Flexibility is key in such an environment, and the MR tanker can provide this flexibility. The MR stem is the most tradeable size, and the ship’s physical dimensions make them versatile by offering the customer the widest range of geographic destinations. In operationally complex trades, MRs increasingly stow various parcels and engage in multiple port loadings and discharges, further enhancing flexibility for regional distribution.
How long the ‘new oil order’ will persist can be the subject of extensive speculation. Irrespective of that, fundamentals for product tanker demand seem stronger than ever.