Urgent need for newbuild tanker orders


High freight rates and robust global demand for oil and its derivatives are putting tanker owners in a great mood and consequently, after a notable uptick in 2023, the surge in tanker newbuild activity shows no signs of abating in 2024.

A confluence of factors has led to this buoyant and profitable market for tanker owners over the past couple of years, a trend expected to persist in the foreseeable future, according to a report from DNV.

In its January 2024 Monthly Oil Market outlook, OPEC said the global oil demand growth forecast for 2024 remains unchanged from its previous month’s assessment at 2.2 million barrels per day (bpd). “A slight upward adjustment to the US forecast has been made given the improving expectation for the US economy, which will have a positive impact on oil demand. This offsets the downward revision made in OECD Europe.

“The OECD is projected to expand by around 0.3 million bpd and the non-OECD by about 2.0 million bpd this year. In 2025, global oil demand is expected to see a robust growth of 1.8 million bpd, year-on-year, unchanged from the last month’s assessment. The OECD is forecast to grow by 0.1 million bpd, while demand in the non-OECD is forecast to increase by 1.7 million bpd,” said OPEC.

The IEA’s January Oil Market Report is less bullish for 2024, stating that global oil demand growth is projected to ease from 2.3 million bpd in 2023 to 1.2 million bpd in 2024, as “macroeconomic headwinds, tighter efficiency standards and an expanding EV fleet compound the baseline effect”.

Meanwhile, the IEA forecasts world oil supply rising by 1.5 million bpd to a new high of 103.5 million bpd in 2024, fuelled by record-setting output from the US, Brazil, Guyana and Canada. “Non-OPEC+ production will dominate growth this year, accounting for close to 1.5 million bpd. By contrast, OPEC+ supply is expected to hold broadly steady on last year, assuming extra voluntary cuts that started [in January] are phased out gradually in 2Q24,” said the IEA.

OPEC sees demand for its crude at about 28.4 million bpd for 2024, which is 1.0 million bpd higher than the estimated level for 2023. “Demand for OPEC crude in 2025 is expected to reach about 28.8 million bpd, an increase of about 0.5 million bpd over the forecast 2024 level,” said OPEC.

Positive supply

Barring significant disruptions to oil flows, the IEA believes that the oil market looks reasonably well supplied in 2024, with higher-than-expected non-OPEC+ production increases set to outpace oil demand growth by a healthy margin. “While OPEC+ supply management policies may tip the oil market into a small deficit at the start of the year, strong growth from non-OPEC+ producers could lead to a substantial surplus if the OPEC+ group’s extra voluntary cuts are unwound in 2Q24.”

The combination of reduced OPEC supply and an increase in non-OPEC production has meant that oil is being traded over longer distances, which is further boosting freight rates, according to DNV.

“Most tanker owners want to take advantage of this positive market environment,” said Catrine Vestereng, business director tankers at DNV. “However, they realise that they need more vessels to do so, and this is driving a big cycle of investment in newbuilds.”

With US-Asia crude trade increasing, DNV expects an uptick in orders for very large crude carriers to cover the longer distances. Adding impetus to this is the aging global fleet, further underscoring the urgency for new tankers. Nearly a third of the 200,000+ dwt fleet is over 15 years old. This number rises to 32% for the suezmaxes and 50% for aframaxes, according to DNV figures.

“The fleet is getting extremely old, which is a growing issue as environmental regulations get stricter,” said Vestereng. “Most of the oil majors are putting an age limit on the vessels that they will use, usually around 15 to 20 years. Safety is part of this, but environmental considerations are more important. Older vessels are much less efficient than newer ones. They have higher fuel consumption, which means more emissions and higher costs, especially in the new regulatory environment.”

New orders needed

The surge in newbuild activity marks a significant shift from pre-2022 when tanker orders were scarce, exacerbating the global fleet’s aging process. Despite an expansion in capacity in Chinese shipyards, the rate of new orders remains insufficient to meet burgeoning demand, thus ensuring that newbuild demand will remain robust in the foreseeable future.

“Even though there appears to be a greater capacity to build tankers from the Chinese yards, new orders still account for a very low percentage of the global fleet,” said Vestereng. “For example, while 29% of the global VLCC 200,000+ dwt fleet is over 15 years old, vessels on the order book only account for 2% of the total fleet. Similar figures can be seen in other subsegments. So these vessels need to be replaced, and it is not happening quickly enough.”

Underlying market fundamentals means that the strengthening tanker market is set to continue, said DNV. “Supply issues are expected to become more accentuated in the years ahead, especially as newbuilds struggle to keep up with a steadily ageing and less efficient fleet,” said Vestereng. “As long as freight rates stay at a high level, the appetite for newbuilds will continue.”

OPEC noted that dirty freight rates rose in January, amid trade flow disruptions that further increased tonnage-mile demand. VLCC spot freight rates on the Middle East-to-West route increased by 24%, month-on-month, while a more modest gain of 5% was seen on the Middle East-to-East route. suezmax rates on the US Gulf Coast-to-Europe route increased by 34%, month-on-month, while aframax rates around the Mediterranean rose by 26%, month-on-month, with “gains reflecting tightening availability lists”, OPEC said.
Source: Baltic Exchange

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