Up and Down and Up again

In Fearnresearch we are generally quite unhappy with "fleet utilization" indices as there is so much room for error and the quality of available information is, in our view, simply not good enough to create a fleet utilization index worthy of the name. Nevertheless, we are making quarterly estimates based on our vessel tracking activity. The model is simple, but requires tedious work, and is based on the ratio between dwt-miles generated divided by the average fleet size (excluding tankers in storage/lay up and coastal trades). The biggest flaw with this method, and with other models as well, is that we are unable to take the effects of varying service speeds into account. With a bunker price of $650/mt, speed has become a major issue these days. In addition, waiting time (especially for VLCCs) can vary considerably and create results that don´t necessarily mirror the real situation.

Nevertheless, the chart shows a very interesting development for the past 7-8 years - there is indeed a strong link between fleet utilization and vessel earnings (in this case represented by VLCCs AG-East). Mathematically, the correlation is not very strong, however, we see the turning points for earnings and utilization occur approximately within the same three month period.

Utilization has declined considerably over the past 12 months, and as such, it seems that either our methodology is wrong, or other factors are playing a more important role. Now, we are unhappy about the concept from the beginning, but during the first 8 months of this year we have observed that owners are actively changing speed in order to maximize daily earnings. According to a major tanker owner, speed should be reduced already at a freight-level of WS 180. Widespread reduction in service speed will, of course, reduce available transportation capacity and maintain a rate floor, albeit an artificial one. In the short term, we should also say a few words about "psychological warfare".

The crude carrier fleets of the world are definitely in the hands of fewer players today than they were 10 years ago. The larger the vessels get, owner concentration increases. A similar development has taken place on the chartering side. When a few charterers decide to hold back their requirements a void is created and rates tumble. On the other side of the divide in the owners´ camp we also observe a resolve to refrain from offering ever lower freight rates for the few requirements that are put on the market in slack periods. Hence, a temporary standoff can occur. All in all, the charterers need to ship oil and owners need to employ their vessels, and it is often only a matter of time before one of the parties has to concede. Over the past two days we have observed large tanker freight shooting up: AG-East up WS 30 points and Suezmax WAFR-USAC up 40 WS points. Why? Nothing fundamental has changed, however, another hurricane is moving towards the USG, but this should not impact the East market.

Despite the fact that utilization is declining, we believe the speed factor is playing an important supply side role that is not detected in the "statistics". In combination with the short-term standoff between charterers and owners we often see considerable fluctuations in freight rates. We expect bunker prices will remain high in the future resulting in supply side dynamics caused by speed adjustments corresponding to market levels.  Further, there is very little chance that we will see fragmentation of commercial control of the fleet. As a result, we expect to see a continuation of behaviour which contributes to high volatility in the marketplace.