What will 2010 Bring?

Since I have been following the Tanker Industry, I have paid a lot of attention to predictions from the market savants. In 2007, everyone expected a strong year, and it was average. In 2008, everyone predicted a weakening market and, despite the global turmoil, it was a very strong year. In 2009, everyone agreed it would be a weak year, and it was. Now, predictions for 2010 are coming in all over the map. While there is a debate whether the market will be weaker or stronger in 2010, even the people who are bullish don't expect rates to be anywhere close to their five year averages. So will 2010 prove to be a strong year or a weak year? What, if any, will be the catalysts? What is important to follow?

There are several important developments in the tanker industry that will unfold in 2010. The first, and most important, is the pending orderbook, which stands at around 30.4% of the total fleet (132.3m.Dwt on order over 435.4m.Dwt total fleet size), entering 2010. Of this 30.4%, 14.8% (or 64.5m.Dwt) is expected to be delivered in 2010. This is a large percentage, but if you look at the pending phase out of single hull tankers (55.4m.Dwt of single-hulled vessels are in the market), the net growth of the fleet this year is closer to 3%-5% depending on how many single-hull tankers are phased out during the year. One thing to remember is that the amount of scrapping will be directly proportional to rates. In other words, if rates remain weak, vessels will be phased out faster than if rates were to strengthen. It makes no sense for an oil major to charter a single-hulled VLCC if they can charter a newer vessel at a similar rate.

The second development to watch is the demand for oil and oil related products worldwide. Everyone knows that demand for oil is growing rapidly in China, and that demand in the rest of Asia is increasing at a brisk pace, however, demand in North America and Europe continue to be the largest drivers for the Tanker market and we expect this to continue in the near term. To put matters in perspective, China’s crude oil imports grew 48% year over year in December to approximately 5.1 million barrels per day from 3.4 million barrels in the year-ago period. In the United States, crude oil imports averaged 8.0 million barrels per day in December, down 20% or 1.9 million barrels per day from 2008 levels. In other words, even though China’s imports grew by 48% year over year, it didn’t make up for the shortfall in demand from the US. If demand in North America and Europe returns to 2007-2008 levels this year, we should see an improvement in tanker rates. It is also important to note that despite the recent correlation of tanker stock prices to the price of oil, the correlation of tanker earnings to the price of oil is insignificant. Theoretically, they should be INVERSELY correlated, as cheaper oil should increase demand.

There is one question mark to this puzzle: When will the tankers in storage re-enter the market?

There are currently approximately 149 vessels used for storage. If the contango trade starts to unwind, these vessels will re-enter the market and weaken rates, if it continues to make sense to roll-over this trade, then the number of vessels used for storage may increase further. Lots of analysts expect this trade to unwind in 2010, but they also expected it to unwind in 2009, so we will have to continue to monitor the situation until it becomes clearer.

So based on what we expect to happen in 2010? In terms of earnings, we expect the year to be slightly better than 2009, although we are more bullish for the second half of the year. In future posts, we will go into more details about values and stock valuations, but this is a bit of a primer on what will drive the markets in the year ahead.