Middle East leads steep fall in global crude tonne-mile demand
Cratering tonne-mile demand in the Middle East, rather than floating storage unwinding across Asia, appears to be underpinning flat-lining tanker rates seen this August
Tanker tonne-mile demand dropped 18.6% in July compared with the same month last year, with preliminary August data suggesting falls of the same magnitude this month. Tonne-mile demand, which measures volumes carried by distance travelled, is seen as a proxy for demand for crude tankers
EVEN though many oil producers reversed voluntary or agreed supply cuts in July, this was the month in which the sharpest falls in tonne-mile demand were noted since the coronavirus outbreak decimated oil demand worldwide.
Global crude demand plunged to 8.17trn tonne-miles in July, down by 18.6% compared to the same period last year, according to data compiled by Lloyd’s List. June was 11.1% lower month on month, analysis of Lloyd’s List Intelligence figures show.
The steepest falls over June and July were recorded from the Middle East and West Africa, which rely on mostly on very large crude carriers and suezmaxes to export crude to destinations primarily in Asia, Europe and the US.
Preliminary August data suggests that month-on-month drops in global tonne-mile demand will be of the same magnitude as July.
Tonne-mile demand, which measures volumes carried by distance travelled, is seen as a proxy for demand for crude tankers.
Analysis shows that tankers shipping from countries that are members of the Organisation of the Petroleum Exporting Countries were employed on the most affected routes, while least tonne-mile disruption was seen for crude shipments from the US, Brazil and the North Sea.
In the seasonally weaker third quarter, August rates for very large crude carriers plateaued to average $10,400 daily, while suezmaxes were slightly higher at $10,993, according to the London-based Baltic Exchange.
Aframaxes, at $6,380 daily, were barely above operating costs and most of these earnings for all tanker types were below owners’ breakeven rates.
Spot rates were between 4.9% and 7% of the record levels achieved for tankers over April, when an oil price war between Saudi Arabia and Russia saw exports rise sharply, boosting tanker demand and pushing earnings to new highs.
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Demand for transport fuels quickly plunged by one third thereafter at the height of the Covid-19 pandemic, and Opec countries and allies quickly introduced supply cuts to control oil prices which slumped to 21-year lows.
However, the resulting crude price contango then deployed as much as 12% of the trading tanker fleet for floating storage, partly sheltering them from the impact of slowing shipments and fewer tonne miles as refineries cut runs.
Amid lower prices, China also ramped up purchases, with record imports and refinery runs over June and July.
The twists and tumbles seen through the prism of tonne-mile demand paint a story of two halves, in which tankers are caught up in the battle for market share between Opec and non-Opec countries.
As Opec output reached 30-year lows, tonne-mile demand figures reflected non-members gaining market share at the expense of those in the cartel.
In the US and Atlantic trades generally, the falls were less extreme and the rebound swifter, especially for the US and Brazil.
Middle East crude tonne-miles for July were measured 15.7% lower on the prior-year period with June levels down 19.2%, to 288.5bn.
By contrast, tonne-mile demand from the US in July had already returned to near pre-pandemic levels, at 83bn tonne-miles for exports of 2.98m barrels per day. That is a 7% rise from July’s 2019 level, although it was 10bn tonne-miles below March 2020 figures and 8.5% down from exports tracked by Lloyd’s List Intelligence three months earlier.
Combined tonne-mile demand for Brazil and the US show numbers higher than 2019 volumes every month throughout 2020, despite the pandemic-induced cuts in exports. Both countries exported greater volumes of crude than they did 12 months ago, even as shipments declined month on month over the second and third quarters as demand fell.
Tonne-mile demand for the two countries increased counter-intuitively by 41% in April compared to the prior-year period and was the highest level seen in records going back to 2012. This was the month the International Energy Agency dubbed ‘black April’ and the low point of the pandemic-induced demand falls.
Tonne-mile demand for Brazil and the US was tracked at 148.9bn tonnes in April, compared to 105.9bn tonnes a year earlier.
In the Middle East Gulf, Saudi Arabian tonne-miles over April were measured 39% higher than 12 months ago, as more than 10m bpd was being tracked shipped from the kingdom in a short-lived price war. That swiftly fell to multi-year lows in June and July, when tonne-miles slumped year on year by 18% and 16%, respectively.
When adding Kuwait, Iraq and the United Arab Emirates, overall tonne-mile demand from the Middle East Gulf saw falls of a similar scale. Over May and June some 4m bpd of exports were removed from the market, equivalent to 60 fewer very large crude carriers.
While tonne-miles dipped in the region, floating storage has remained persistently high globally since May. About 40% of tankers from panamax ships to VLCCs tracked at anchor for 20 days or more were at anchor off China, after port and storage logistics were overwhelmed by record exports in June and July.
The pace and scale of unwinding floating storage is crucial to any earnings rebound in the fourth quarter, when refineries boost production of middle distillates including gasoil for the northern hemisphere winter.
Yet inventory drawdowns may further hinder any ramp-up of tonne miles in August, even though a further 2m bpd is estimated to be returning to global supply, measured at 90m bpd in June by the IEA.
Tonne-mile analysis shows that where rebounding crude demand is rising as well as volumes is another factor that will determine how earnings will perform in the final three months of 2020.