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        Expert Meeting Minutes | Oil transportation tariff interpretation and outlook exchange points

        Senorita Earnings wrote a column · 03/01/2023 13:18
        Core point:
        1. The International Energy Agency forecasts that U.S. oil production will increase by another 950 Kb/d by 2023 while domestic oil demand remains virtually unchanged.
        2. We expect more crude oil exports from the U.S. Gulf in 2023 but fewer incremental barrels from Europe.
        3. As a result, we expect VLCCs to be less competitive in transatlantic trade, with Suezmax and Aframax regaining market share.
        Full text:
        Question: Since the Spring Festival, the freight rate of VLCC has been soaring, reaching 50,000 per week. After the sanction of refined oil products, the freight rate of M.R. also jumped up, and it was sideways at 40,000 recently. Interpretation of industry and freight rate changes after the Spring Festival?
        A: Before the Spring Festival, the declines in both cities exceeded expectations. The entire industry has reached a consensus on the arrival of a significant cycle of crude and refined oil products, but the decline may weaken some people's confidence. However, after three consecutive weeks of rising in the industry after the year, it again gave confidence.
        Crude oil: Confidence is emerging and rising slowly, and the cycle node is approaching. The chaos in the early stage has basically ended, and the market has begun to consolidate, but the demand is still on the way, and the actual significant need has not yet arrived.
        1) VLCC continued to fall before the Spring Festival, and the decline during the Spring Festival exceeded expectations, with TCE around 17,000-18,000 US dollars. The descent, then, is the reason for the rise this time. The logic behind it is that Russia's 12.5 crude oil sanctions brought about by the Russia-Ukraine conflict in the early stage caused market chaos: 1) restructuring of the trade pattern, 2) replenishment of transport capacity, and 3) degree of adaptation to different countries. In mid-December, Russia's crude oil exports fell sharply and returned to a relatively low level in January. February was close to normal. Exports are redirected to India, China, and Turkey. In December, no Russian vessels were sailing from the Atlantic and Mediterranean basins to China in the market. Still, several VLCCs could be seen floating to China after the Chinese New Year in January.
        Another focus is establishing STS areas around the Mediterranean-Atlantic region, partly Afra-type and Afra-VLCC STS, for long-distance transport. There is no doubt that VLCC is aimed at long-distance transportation, such as in India and China. In addition, you can see that the traffic flow of the Suez Canal reached its historic peak in January. Recently, the Suez Canal authorities raised the canal tolls for oil tankers.
        2) Epidemic: The most significant uncertain factor in 2022 is the epidemic's impact on my country. However, the sudden easing in December caused the economy to stagnate in the short term. But after the Spring Festival, the economy began to restart, and demand returned to the market. In the second week after the Spring Festival, there was an accelerated jump, and Sinopec suddenly won a considerable part of the market. According to the data, 15 VLCCs are needed.
        3) Traditional off-season: New Year's Day, Christmas, and Spring Festival holidays overlap but end after the Spring Festival.
        4) Some trays taken before the Spring Festival were not on the market but were on the market after the Spring Festival.
        The cycle node is approaching: I judge that $50,000 has yet to reach the time point and height of the two-to-three-year cycle that is finally recognized by the market. The high end of the extensive process will not be reached until next month or as actual demand and policy emerge.
        Today's market mainly depends on the restart of my country's economy, followed by quotas. The quota will no longer have a strong stimulating effect on the market, like in 22Q4. At present, reaching 50,000 US dollars is an average market performance, but there is still a certain distance from the actual restart of my country's economy. My country's cycle started in March, and the high point of this cycle may be set from March to April.
        Refined oil: From Suez to East and West, various types of ships rise alternately, and there is still a long way to go in the cycle. The height is expected, and the future is uncertain.
        The first week after the Spring Festival: the market east of Suez is booming, and TC7 & TC11 are the first to drive (stimulated by domestic export quotas). On the other hand, in 2022, the world economy, except for China, will surpass that of 2019, and the trade of crude oil and refined oil will increase significantly, but my country will see year-on-year and month-on-month declines. However, in the short term, many quotas will be released in the fourth quarter, stimulating the global market. In January, my country released the first batch of export quotas, which were fed back to TC7&TC11. In 2022, the hot refineries in the refining and chemical industry will have missed a lot of maintenance time. The traditional off-season is here, and it's time for maintenance. As such, there is considerable Refinery maintenance in Australia, the U.S., and Europe. Portation tariff interpretation and outlook exchange points
        The second week: a Turkey earthquake occurred. Turkey is a transit point for Europe, Russia, and other places, resulting in short-term stagnation of crude oil flow, thus causing an MR-type jump in the Mediterranean and Atlantic basin.
        The third week:
        The sanctions on Russian refined oil products came into effect.
        The two-way trade changed, and the shipping distance was improved.
        Large-tonnage vessels were used to reduce the cost as much as possible, resulting in a jump of about 70% in L.R. type.
        Q: crude oil sanctions at the end of 2022 caused crude oil freight rates to exceed expectations to the downside. But 2.5 after the refined oil prices but not downward?
        A: (1) The transportation pattern is chaotic after crude oil sanctions, superimposed on multiple negative factors (traditional off-season, Chinese economy, etc.). The refined oil chaotic period is not over. There are several positive stimuli in the layout process: (1) China's export quota, (2) the world and European-oriented countries rely on Russian refined oil much more than crude oil. In addition, refined oil products have limited inventories like crude oil. The stocks from the previous rush will not support for a more extended period either.
        The pattern of refined oil trade has yet to be finalized; moreover, before the conflict, there was no gray fleet, and further sale and purchase of second-hand ships are needed to organize this capacity composition, but the direction of Russian refined oil exports lacks China and India. So crude oil there will be a little later, that is, by mid-March to mid-April, to establish a high point. But this year's height will likely be higher in the short term than in crude oil.
        Q: How do you look ahead to the second quarter, and what variables affect the market and freight rates in the short term?
        A: We can no longer evaluate the crude oil and refined oil markets regarding the off-peak season because the off-peak season is a change in capacity through supply and demand under a relatively stable overall transportation pattern. Now everything is in the beginning stage, crude oil from chaos to stability, China's economic restart.
        Positive factors predominate, such as the withdrawal of old capacity at a certain point, environmental protection policies, and decreasing tolerance for the degree of safety of old ships.
        Russian oil sanctions continue to tighten is not very likely, because the sanctions this time is different from the sanctions of other countries, distinct from Iran and Venezuela, this time the two main underlying logic of sanctions are (1) to maintain adequate liquidity of the market, (2) to maintain the adequate liquidity of low prices, reducing Russia's fiscal revenue, thus offsetting the price of crude oil products around the world on the one hand, and in addition, Russia to reduce fiscal revenues. So far, it has worked, as the economic data for Europe and the U.S. in January was outstanding, reducing some of the world's previous concerns about recession.
        If Russia wants to reduce production further, the world's oil prices may rise at high speed to 100 U.S. dollars or breakthrough 2022 or before 120, 140 U.S. dollars, a short time will affect the overall level of supply and demand, to reach a high balance, while there may be a short time to cancel part of the capacity, to feedback to the market. But in the long run, there should be little doubt about the arrival of the whole big cycle.
        Of course, a part of the view also fears the end of the Russia-Ukraine conflict and, thus, the lifting of sanctions. The decoupling of trade or energy between Europe and Russia is long-term, even if the end of the match, sanctions are also long-term unless the whole of Russia its regime is subject to change into the subject of aggression against the West. Still, the probability of this is negligible. If such a probability occurs, it will be in the premise of the sky volume of transport prices before the arrival of this primary cycle.
        The most significant support point is that effective capacity replenishment is insufficient. New orders are very inadequate, and even with the hot market last year, we didn't see new orders coming in. So this time to find some negative factors are not particularly good to find.
        But one thing determines this significant cycle's ultimate height and timing: the size and timing of our economic reboot. The reboot's peak and node have not yet been reached. It is only in the early stage, so the market gets some confidence. A certain amount of the standard recovery period of some demand is reflected in the market, thus giving everyone so much confidence, but the back can be expected.
        Q: In the second quarter, there is a part of the first voyage of refined oil tankers back to the crude oil market. Is it going to have some impact on the natural oil market?
        A: Crude oil and refined oil transportation can be interoperable, and conventional Aframax and LR2 can be interoperable. In essence, if the sky is the price of the ride, M.R. can also transport crude oil, and VLCC can also transport refined oil as long as they are cleaned.
        This part of the maiden voyage is also within everyone's previous estimate of ships. This part of the volume is tiny, and the fundamental link still depends on the final cycle height of this year to bring the number of orders.
        Q: Russian refined oil exporters are scattered, and buyers are hard to find. People are worried that this part of Europe does not want to see other buyers, reducing production and leading Russia to export directly with crude oil.
        A: This situation will occur. Russia recently announced a 500,000-barrel-per-day production cut because there is no direction to export. Finished oil can not find a large volume like in China. India eats into the trade side and can only turn to some small trade side, less than Europe's import demand, resulting in a decline in exports of refined oil products. Russia will undoubtedly reduce domestic refinery capacity based on the oil output feedback. In the short term, Russia's refined oil exports will be significantly reduced, and long-term recovery to normal levels.
        No. 1
        Because refined oil products are a product of regional trade, losses are higher than crude oil if transported over long distances. However, crude oil and advanced products support Russia's financial and war needs. In January, with the arrival of sanctions, Russia's financial revenue decreased by 46%-50%, and in the future, with a stable trade pattern, Russia will increase crude oil exports.
        There is also no need to worry about the global shortage of refined oil products because when there is a decrease in one direction, there will be an increase in the other.
        Q: Russian crude oil and diesel exports are very cheap. Is it possible for China to increase the import of Russian refined oil products and then sell the refined ones to Europe at a high price?
        A: The formation of the trade pattern will produce this situation. As soon as the refined oil is blended, it will be converted to a commodity and thus become legal. If such a region is created in proximity, for example, in the Mediterranean and Atlantic basins, it will flow back to Europe in disguise. This region is also forming in the Middle East. Some of the ships are making this trade.
        In addition, the flow volume to China and India will be insignificant. The commodity nature of refined oil determines that the inter-regional trade is under the premise of an inevitable spread, even if the value of refined oil is now 30-50 USD a barrel, different from the traditional market. But with the loss of time, if the spread of the drawdown, it will reduce this aspect of an operation.
        Even if our country and India can import, Russia does not necessarily have the will to export so much because the value of exported raw materials is low. Still, after sanctions, the profit margin earned needs to be higher than that of finished oil. Because the cost of oil needs to be processed by itself before it is sold, the charge decreases again. The cost of crude oil extraction is almost negligible, but the finished oil goes through a series of refineries that add a portion. It prefers to export the feedstock if it is far away. But over time, this trade you speak of does exist, and it exists in small amounts now and will increase further, just less than one might think, affecting the level of market freight rates.
        Q: How do you track the STS region?
        A: It is only possible to track if you look at the ship's movement every day, such as which area has VLCC gathering, but many times the boat will change the GPS to affect the tracking. Sts area will undoubtedly be on the high seas because this kind of trade is gray. The Mediterranean basin has attracted the attention of Spain and the U.K., and this region faces sanctions. Still, it is possible to push to the Atlantic Ocean over time, an area that cannot be regulated. Russia's STS region will be in the Mediterranean or Atlantic basin in the short term, possibly pushing towards the high seas basin, the deep Atlantic, and the African region in the future. Or it has recognized now the two largest STS areas: Malaysia's Southeast Asia basin and the U.S. Gulf U.S. STS area (U.S. control, legal). Several other major STS areas are gray.
        Q: How about the take on refined oil tankers? Are there as many taken by traders as crude oil?
        A: From 2022 to now, the hotness for crude oil and refined product second-hand vessel sale and purchase is better than the freight rate, which has been hot without fluctuation. These three weeks after the year, especially the recent week, the sale and purchase of second-hand vessels concentrated on M.R... That is, this part of the route is still making preparations. For judging the cycle, Ihere maybe sometime, there may be some fluctuations next week, and the final determination of the whole trade pattern still has to wait until the end of March or early April.
        Q: March-April formation represents the pivot of freight rates in the next few years because this year's off-season China has returned to normal. From the demand in the future, there is little change.
        A: (1) this year, the slow rise in the world, China's return to the prominent position, the economic restart, and back to average trade volumes, and thus the main underlying logic formed. (2) After the Russia-Ukraine conflict, the trade pattern after the two-way change of trade pattern of the finalization; (3) crude oil refined oil capacity to supplement limited. These three underlying logics determine the balance of freight rates in todays or long-term market.
        After these uncertainties are implemented one by one around April, the whole pattern is stabilized, which is the arrival of the said significant cycle. However, climbing to a peak during the traditional peak season in the fourth quarter is possible. However, the final 2-3 year equilibrium point is still the equilibrium point after these primary logics are finalized.
        Q: When will future orders for shipbuilding be available?
        A: There are several concerns (1) the cost of construction, (2) the environmental protection policy, and (3) the occupancy rate of the shipyard. We can see some orders coming in March. With today's hot shipbuilding industry, the short-term arrival of crude oil and product sea orders is unlikely.
        In the long run, environmental protection policy is divided into three steps, now is only the first step, 2030 or after the requirements of ship hardware (host and fuel) will also tighten; second, in fact, with the tightening of environmental protection policy, as well as the arrival of some new energy policy, it is possible that some of its fossil fuel market, the energy market red-hot degree does not reach the 20-year cycle to operate.
        But with the coming of the big cycle, it does place specific orders. In addition, crude oil and refined oil have a considerable proportion of old ships, and crude oil has 10% refined oil, more than 12%. This part of the short-term exit from the market is a relatively slight possibility. Short-term two environmental protection policies for crude oil and refined oil old ship role is minimal, with time, will play a more significant role. There will likely be a point when certain countries may ban older vessels because the safety level is relatively low if a particular event, such as the grounding in the Malacca Strait last year, produced a similar event.
        Q: China's refining capacity exceeds that of the U.S. How will these capacity surpluses be addressed in the future? Will the export of refined oil products increase?
        A: Domestic production capacity does exceed that of the United States, but there is a quota control on refined oil exports. Undoubtedly, the mainstream view in 2023 is to develop the economy. This year, there is an economic, policy, and international demand for refined oil exports as it fills the Russian share and the return of profits. With the devolution of the first sea quota, will the second quota also ushers in a volume that everyone expects? For example, there are 10 million tons. If there is a volume of 10 million tons, it is an encouragement in the policy. My view is that the export of refined oil products this year is a trend of encouragement in it because the behavior of arbitrage is there, already different from 2021 and 2020 ( There is no arbitrage in the market at that time, there is only a part of the tax benefits of commodities).
        Several major oil traders worldwide last year with better operating efficiency, mainly business oil trading and refining. On the contrary, domestic refining enterprises are also better if the export quota accounts for a relatively large amount of economic data. In short, the financial return on exports is better than the domestic. Even if there is a tremendous domestic demand for refined oil products, China's refining capacity is sufficient, except that the quota is a significant factor limiting exports. But now the whole market is optimistic about further export quota increase.
        Q: When the freight price of refined oil products rises to a certain level, will it lead to the disappearance of the demand for this part of cross-regional arbitrage, which will limit the freight price?
        A: When the cross-regional arbitrage spread becomes smaller, it will inevitably restrict the trade flow, and eventually, feedback to the cross-regional freight rate will only rise for a while. Refined oil is a regional transport, such as the previous European Russian, American, and United States plates. Still, cross-zone arbitrage is from East Asia to Europe, from the United States to Europe in the form of this trade. This long-distance trade is bound to have a large enough spread that
        Q: Under the new environmental regulations, how much room for future speed improvement can there be?
        A: The impact on transportation is minimal now. Because the transport speed of crude oil vessels is lower than people think, the total load fluctuates between 12 knots-13.5 knots and, in very few cases, will run to 15-16 knots.
        When traders place orders, they already consider the distance, shipment time point, transportation time point, and speed. The most significant cost expense for traders is the cost of fuel. The rate of fuel consumption is proportional to the cubic equation of speed. That is, 13 knots is a speed of 13.5 knots, and the amount of fuel is exponentially increasing. An increase to 13.5 would be good, but a small amount has the potential to run up to 14 knots. But this kind of VLCC is whole 14 knots, 15 knots is rare, and the damage to the ship will be significant.
        Obviously, VLCCs are speeding up both full and empty, but they are at 12-13.5 knots. Also, now the shipowner traders will go extremely close to the peak of loading, deepening the efficiency of the whole trade and thus producing a hot market.
        In addition, after the Chinese New Year, traders speed up the ordering of time charters, so they should have confidence in the hot market in the future.
        Q: In the dimension of 3 months, six months, and one year, do you prefer crude oil or refined oil products in the future?
        A: The big cycle starts in March. In the first three months, in close view rather than absolute ratio on price, the extensive process of refined oil will be higher than crude oil because of the change in supply and demand, the shift in trade, the difference in the direction of supply and demand, the retention of the fleet, and the difference in the power of the capital side of behind-the-scenes trading are all higher than crude oil. But after 2023, when the refined products solidify the big cycle, over time, there will be those variants of the previously talked about an approach that will ease the cycle height. Crude oil is now past the chaotic phase and can see a slow rise to the final equilibrium point of the grand cycle. But even in the regular trade phase of crude oil, without a series of black swan events and changes in the underlying logic, there are short periods of up-and-down fluctuations in crude oil. That is, traders and shipowners will play a big game for freight rates within 2 to 3 weeks (especially in China), but overall it has to reach a high point to balance.
        Changes in the refined oil tanker tend to be slow. There will not be a significant fluctuation; up there may be a slow rise, a jump up, or a slow downward movement.
        To sum up, the big cycle is a consensus, and now crude oil is nearing the process, and refined oil products are still adjusting.
        In the short and medium term, refined products are higher than crude oil in this cycle. But in a long time, crude oil may be better than refined oil.
        The timing and height of our restart determine the height and point in time of this major cycle.
        The quantity of the arrival of the final shipbuilding volume determines the length of the cycle.
        If people look for some negative factors, I think it has not been easy. The biggest uncertainty last year was the impact of our economic epidemic. But there is also a huge variable: the rapid upward movement of crude oil prices when it is possible to see the presence of countercyclical because high oil prices will affect supply and demand in the short term, but this is also short-cycle, you can look back to 07-08 and can see similar elements. $ China Merchants South Oil (SH601975)$ $ COSCO Hainan Energy (SH600026)$ $ China Merchants Shipping (SH601872)$ US crude oil exports could increase in 2023
        2022 is a perfect storm for U.S. crude oil exports. U.S. production is increasing, there is ample export infrastructure in the U.S. Gulf Coast, and customer demand (especially from Europe) is high due to the sanctions imposed on Russian exports. On top of that, the U.S. government announced and executed the largest Strategic Petroleum Reserve (SPR) release in its history. For six months, 180 million barrels of crude oil (equivalent to 1 million barrels per day) were released, most of which ended up in the export market. In addition to this impact on the oil market, the tanker industry has benefited from this crude oil wave. In this week's Tanker Opinion, we discuss these developments in more detail for 2022, and we look forward to seeing the outlook for U.S. Gulf crude exports in 2023.
        U.S. crude oil exports began in 2016 and climbed rapidly to 2.5 Mb / d in 2019. it remains near this level through 2021. in 2022, U.S. Gulf exports jumped 29% to 3.4 Mb / d, up 763 Kb / d from 2021. this increase is triggered by a combination of two events: increased U.S. production and a significant release of SPR. According to the International Atomic Energy Agency, U.S. oil production increased by 1.17 Mb / d from 2021 to 2022, continuing in the post-epidemic recovery and driven by higher prices. The SPR releases announced in March began to appear in export statistics later in the year.
        Where is all this extra crude going? The short answer is Europe. After Russia fell in love with Ukraine (precisely one year ago today) and the U.K. and E.U. decided to abandon Russian oil and oil products, the increased supply of U.S. export barrels came in very handy. Northwest Europe increased its purchases of U.S. crude oil from an average of 683 Kb/d in 2021 to 1,064 Kb/d in 2022 (+56%). European countries in the Mediterranean added another 123 Kb / d (+79%), and Asia added 170 Kb / d of U.S. crude oil imports in 2022 (+13%).
        An unexpected development in the tanker market is that a significant portion of the additional barrels shipped from the U.S. to Europe is transported via VLCCs. As shown in Figure 2, VLCC movements from the U.S. Gulf to Europe are relatively rare until 2022. This changed rapidly after the invasion. Almost all of the additional sales to Europe are made on VLCCs. What are the reasons for this change, and will this continue, or may it be temporary? There are many reasons for this development. First of all, since Russia exports crude oil mainly in Aframaxes and Suezmaxes (whose terminals cannot carry VLCCs), the demand and rates for ton-miles in these tanker segments have increased dramatically in the post. This makes VLCCs relatively cheap, both in USD/bbl and on an absolute basis.
        Source: Lloyd's List Intelligence
        This development is reinforced by China's crude oil demand falling by 400 Kb/d in 2022 compared to 2021, as its economy struggles and frequent Covid blockades dampen oil demand. The reduction in Chinese oil demand has also freed up VLCC capacity. Last, U.S. producers continue to improve crude oil export logistics in the Gulf of Mexico.
        The International Energy Agency forecasts that U.S. oil production will increase by another 950 Kb/d by 2023 while domestic oil demand remains virtually unchanged. This will leave most of the additional barrels available for export. While we do not expect another significant SPR release this year, some sales are planned for this year. About 26 million barrels will be delivered to buyers in the second quarter of 2023. The U.S. infrastructure is well-equipped to handle increased exports. However, more additional oil may be shipped out of Houston as the pipeline to Corpus Christi (currently the most popular export facility) is nearing capacity.
        In summary, we expect more crude oil exports from the U.S. Gulf in 2023 but fewer incremental barrels from Europe. This means more crude could go to Asia, especially China. The Chinese economy is reopening and recovering rapidly after the Chinese government abandoned its zero-new-crown policy. We expect U.S. crude to meet at least part of China's oil demand growth (+900 Kb/d) by 2023.
        For the VLCC market, more cargo will likely be used on long-haul routes to Asia, boosting tonne-mile demand and freight rates. As a result, we expect VLCCs to be less competitive in transatlantic trade, with Suezmax and Aframax regaining market share.
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