The ongoing lull in scrapping activity is a worrying sign for the crude tanker market which is struggling with overcapacity. Moreover, a sharp decline in vessel earnings in 2H20 has also failed to rekindle demolitions. Only one VLCC has been scrapped since the beginning of 2019, while 104 new VLCCs have been delivered during this period, inflating tonnage supply

The recent news about potential COVID-19 vaccines has imparted optimism to the oil market as prices surged past the $50 per barrel mark in anticipation of a prospective recovery in oil demand. However, global oil demand is unlikely to return to 2019 levels before 2022, as the pace of vaccination e worldwide will face storage and logistical challenges, in addition to uncertainty over the safety and efficacy of vaccines.

In addition to weak demand, a vast inventory overhang will also hurt crude oil trade in 2021. After a massive build of 325mb in 1H20, OECD oil inventory declined modestly by 22.7 mb in 3Q20 to 3192mb, about 9% higher than in the same period last year. The recent return of oil prices in backwardation after a long period of contango is likely to speed up inventory drawdown, which in turn will curb trade.

Meanwhile, floating oil storage, which has declined in recent months because of the flattening of the forward curve of oil prices, will also decrease further, inflating tonnage supply. The crude tanker fleet locked in floating storage has fallen from 11% of the total fleet at the end of April to about 7% in Nov 2020, as many Suezmaxes and Aframaxes storing oil have returned to trade. However, about 74 VLCCs are still locked in floating storage, and these vessels will expand available supply once they return to trade.

Weak oil trade prospects and possible tonnage influx from floating storage suggest that any recovery in market fundamentals is hinged on the extent of scrapping activity. However, as the fleet is young, a rapid rebalancing is not possible without a decline in the average scrapping age below 20 years.

About 81 VLCCs are due for the fourth/fifth special survey by the end of 2022, while 102 VLCCs are scheduled to be delivered during this period. Of the 81 VLCCs, 23 vessels are storing oil, and nine vessels are fitted with scrubbers/BWTS. While VLCCs locked in floating storage are likely to be scrapped before the next survey, tankers fitted with scrubbers/BWTS should continue to operate beyond the next special survey.

If we assume that all the vessels without scrubbers/BWTS will be scrapped before the fourth/fifth special survey, the VLCC fleet will still expand by some 30 vessels to 863 vessels by 2022. Hence, by the time oil demand returns to 2019 levels (by 2022 in the best-case scenario), the VLCC fleet will expand by 59 vessels (6.7%) from 804 vessels at the end of 2019. Therefore, without large scale scrapping of vessels below 20 years of age the crude tanker market seems set for a long and painful recovery.
Source: Drewry