Risk mitigation and damage limitation appear to be the least that tanker ship owners need to undertake in order to stay afloat. In its latest weekly report, shipbroker Gibson said that “in one of the most uncertain peacetime periods ever witnessed, trying to make a call on the future direction of the market is a near impossible task. Almost every major economy has now implemented a lockdown as governments desperately fight to contain the virus. This of course, is having a major impact on refined product demand, forcing refineries to act by cutting run rates”.
According to Gibson, “one of the few exceptions appears to be China, where refinery throughput is reported to be rising as the country scales back its containment measures. However, even within China, movement controls remain in place, most notably within the aviation sector where airlines are permitted to service each international route only once per week. With aviation being the most impacted transport mode, jet fuel was of course the first commodity to see significant demand destruction and is likely to see considerably more pain in the coming weeks. In the past week India has cancelled all domestic flights, Dubai airport has closed, and Singapore Airlines has cancelled 96% of its services through to April. The world’s largest carrier, American Airlines has cut 75% of its international capacity until at least May, while most of short haul European flights have also been cancelled.
These announcements are just the tip of the iceberg. Refineries therefore must react. Globally refining margins for gasoline and jet fuel have fallen into negative territory at times this week. In most cases, margins have moved to levels not seen since the financial crisis more than 10 years ago. With the virus now entrenched in most parts of the world, these curbs look set to remain for some time and may become more stringent. Whilst much of the focus appears to have been on the West in recent weeks, a growing pandemic in Indonesia, Malaysia and Australia, which are collectively home to over 380 million people, threatens to further cripple product demand. Refineries will therefore have to react fast to keep up with the pace of demand destruction”.
The shipbroker added that “the rapidly evolving situation in the United States is even more troubling, where the volume of demand destruction will be unprecedented. The world’s largest oil consumer, which consumed over 9.3 million b/d of gasoline alone last year, has already seen gasoline demand slide 10% in the last week. More and more US refiners have announced run cuts, although some have had to defer maintenance to avoid the risks involved in having additional workers on site. It is also worth noting that the United States is one of Europe’s biggest gasoline export markets, further impacting on the profitability of European plants. In particular, New York, which is the main gasoline import hub and the worst impacted area of the United States. Europe’s other key gasoline export market, West Africa is also now having to impose lockdown measures which is likely to further crimp its import demand”.
Meanwhile, Gibson added that “gasoil has been the one bright spot for refiners as it remains supported by industrial demand and consumer stockpiling as prices fall. However, as stockpiling demand wanes and warmer weather reduces domestic heating demand, margins for this product are too likely to come under pressure. Although demand in China is expected to rebound, high stocks and high domestic output may do little for global gasoil margins”.
The shipbroker concluded that “estimating how big the global demand contraction might be is a moving target. This week the IEA suggested that with 3 billion people in lockdown, world oil demand could fall by 20 million b/d, whilst some reports suggest that Chinese oil demand declined by 40% during the peak of the country’s containment measures. If that percentage figure is applied to OECD Europe, the USA, Canada and Mexico, then demand could contract by over 15 million barrels per day. This of course excludes the rest of the world, but with total world oil demand of around 100 million b/d, a calculator is not required to estimate the potential demand hit. Indeed, early estimates of demand contracting by just a few million b/d over the coming months seem somewhat wishful thinking now. Therefore, further refinery run cuts are inevitable, and if something is not done about crude supply, then so is floating storage. Refined products already on the water or coming out of refineries may also need to be floated in the coming weeks if product supply cannot be cut fast enough – watch this space”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide