By Henry Curra
With almost all shipping markets performing well, the mood at this year’s Posidonia was unsurprisingly upbeat. But the conversations we had over the past week also revealed a growing uneasiness about the future. Can the rather unique drivers of today’s tanker demand meet the challenge of rapidly expanding shipbuilding capacity?
Here's our critique of some of the more optimistic views we picked up at Posidonia’s lavish events.
1) “Fleet supply is not a big risk, yet. Yes, recent tanker ordering - particularly of large crude carriers - is troubling, but new ship deliveries can easily be offset by the exit of older tankers, leaving fleet growth flat at manageable levels.”
Braemar’s view: for as long as rates and forward sentiment remain strong, as reflected by high TC rates and asset values, ships between 20 and 25 years old will find employment.
Optimists cling to the hope that Trump will shortly lift trade restrictions on Iran and Russia. They believe this will remove a large chunk of employment for overaged ‘shadow’ tonnage.
But we expect both Iran and Russia will cling on to whatever trading advantages they still have - including the use of older vessels - for at least another year or two. The removal of these older ships will instead require a period of weak rates, and weak forward sentiment.
We do, however, think this purge of older ships will come early enough, and be sufficiently short-lived, to allow a rejuvenated fleet to return to profit relatively quickly.
Yard capacity is certainly a growing concern. Shipyard profits at today’s newbuild prices will attract more players, or at least more capacity. Then again, shipbuilding could be in for a bumpy ride if sanctions target either the yards or related businesses (Hengli Petrochemical, for instance).
2) “Fleet utilisation will be boosted by growing trading inefficiencies. A growing fleet gives world leaders more flexibility to leverage shipping to achieve geopolitical goals.
Braemar’s view - as we find ourselves in the more pessimistic camp when it comes to the West’s ability to quickly resolve its differences with Iran, Russia, China, Cuba and whoever else might emerge to challenge the West’s world view, we would lend our support to this view. Moreover, the emergence of players like Sinokor who are willing to hold out for big numbers in higher risk load areas will add to that inefficiency as their fleet expands.
3) “Hormuz will open soon. This will allow oil exports to recover, thereby creating additional demand for tankers - particularly those with a higher appetite for risk - as demand returns and stocks are rebuilt.”
Braemar’s view - we agree that an early opening of the Strait of Hormuz would support freight rates. In this scenario, a risk premium would continue to help those willing to trade in and out of the Mideast Gulf for a year or more - assuming free movement can be sustained. Ships out of position, or with the wrong cargo history to load particular products, would boost the market in the initial months.
However, should Hormuz remain closed to all but a handful of tankers, which right now seems to us the most likely outcome for the next six months or so, demand destruction will quickly replace stock draws as countries look to preserve a depleted supply buffer. This will harm freight rates overall, even though charterers will continue to pay a premium for prompt ships.
In our worst case scenario, a short-lived Hormuz opening followed by a lengthy closure would allow more ships to escape the Gulf than to enter, increasing the trading fleet outside the Gulf at a time of weak demand.
Once free movement through Hormuz can be guaranteed, the process of building commercial and strategic oil stocks back to (and probably beyond) the ample stock buffer we had prior to the Iran war will support tanker demand. But governments will take their time rebuilding strategic reserves. As such, stock building will merely raise the floor for demand when oil prices are low.
4) “Oil demand in China and elsewhere will come rushing back once oil prices relax. Higher EV adoption and lower petchem demand since the Iran war has allowed China to cut its oil imports since the Iran war. But once oil prices ease and refining margins improve, Chinese oil demand will surge. Pent up oil demand (principally to produce plastics) and economic growth will combine to front-load the recovery.”
Braemar’s view - we underestimated the pace of China’s oil import growth (led by petchems and stock building demand + discounted shadow crude supplies) after the import slump 2024. We are reluctant to make the same mistake twice. That said, our analysts are split on this one.
There is a case to be made for a rapid recovery in Chinese oil demand once oil prices relax. China’s exports are surging, despite Trump’s tariffs. However, China’s property slump and weak domestic demand will act as a break on growth. Another challenge to crude imports is the uncertain future of China’s smaller independent refineries. Granted their resilience has consistently wrongfooted oil analysts for many years, but this time things could be different. A rationalisation of Chinese refining capacity starved of discounted feedstock would reduce both crude imports and the exportable surplus of Chinese refined products.
But here again it is all about timing. For oil prices to relax we need certainty concerning the ability to tap Mideast Gulf exports. We fear this certainty is at least 6 months off - just consider how long it has taking shipping to return to Bab-el-Mandeb and the Suez Canal after the disruption caused by Houthi attacks on shipping. The economic wound resulting from the protracted inflation from a delayed reopening of Hormuz would be slow to heal.
5) “The threat to oil demand posed by the energy transition is negligible over the next 5 years. While Trump’s foreign policy has added urgency to new green energy projects outside the US, as a means of reducing dependence on imported energy, the expansion of energy demand itself means oil demand will grow once oil prices relax.”
Braemar view - we would broadly go along with this view. The massive growth in energy demanded by the proliferation of new data centres alone has reduced the opportunities for the world to ‘transition’ away from oil. We are simply expanding the energy cake.
In short..
Tanker owners will naturally lean towards optimism. Those we met during Posidonia were certainly not blind to threats on the horizon, but few foresaw a return to pre-2022 weakness in the next few years.
Likewise, we view the geopolitical climate for the remaining years of Trump’s administration as broadly supportive for freight. Our more pessimistic view on the timing of a normalisation of Mideast Gulf exports prioritises some of our more bearish scenarios. But we have no inside track on how and when conflicts between the US and Iran, Israel and Gaza/Lebanon or Russia and Ukraine will unwind. Nor for what new conflicts will emerge to replace/join them.
That said, our best guess is that tanker markets will weaken over the 12 months as delayed demand recovery is outpaced by the growth in tanker supply. By 2H 2027 a clear-out of older, thirstier units will get underway, albeit complicated by restrictions on buying sanctioned tankers. The clear-out will be lubricated by the IMO’s tighter CII regulations and possibly some sanctions relief on Iran and Russia.
From then on, a combination of economic recovery and a global stock build will support the market until 2029. Oil supply should by then be running ahead of demand and a contangoed forward oil price structure will join geopolitics to cut tanker trading inefficiency. This will shelter the freight market from the onslaught of crude tanker newbuildings we expect to see in 2H 2027 and 2028.
We see 2029 as the start of a cyclical downturn as wealthy owners across all shipping sectors pile profits into new and highly efficient tankers over the next six months.