- August 22, 2022
- Posted by: Solverminds
- Category: Innovation
Navigating the Murky Energy Market with Optimized TankersInflation is Tipping the Energy Markets
The oil trade is one of the most volatile trades in the global economy. The ongoing COVID-19 pandemic and the Russia-Ukraine war have only worsened the prospects.
These factors, compounded by the impact of inflation, have led to a spate of inflation reports across multiple countries. Could we be heading into a recession? Speculation is rife.
As a result, crude oil prices have been seesawing across all three primary benchmarks.
- The first week of July (week 27) opened with a record drop of 9% in the Brent crude futures, the most significant daily percentage decline since March 9th and affecting the shares of major oil and gas companies.
“We are getting creamed, and the only way you can explain that away is fear of recession,” said Robert Yawger, director of energy futures at Mizuho.
If the available tanker capacity is expended inefficiently, the situation will worsen. Without tanker optimization and scheduling, we face the problem where some tonnage is stuck in port congestion and hinders the critical flow of oil in most parts of the world.
Covid-19’s Unending Grip on Oil Trade
In July 2022, Covid-19 cases flared up in China, sparking fears of a fresh wave of lockdowns. This could further deepen cuts in oil consumption in China, a significant energy market.
In the aftermath of a dramatic drop in oil demand in 2020, the tanker market continues to experience volatile conditions:
- According to data by Poten & Partners, VLCC spot fixtures were down by 7% compared to 2019.
- In the Suezmax segment, spot fixtures reduced by 23%, while the Aframax fixtures fell by 20%.
However, as countries started to rebuild oil stocks in the third quarter of 2020, tanker markets responded positively. Unfortunately, it was not a sustainable improvement; as stock peaked, conditions quickly turned.
The first half of 2021 appeared gloomy for the tanker shipping market. Yet the second half of 2021 was characterized by an increase in oil demand:
- This positive trend spilled over in the first half of 2022, with the number of VLCC fixtures increasing by 19% compared to the same period last year. The global recovery from the Covid-19 pandemic during the year’s initial months influenced the fixture counts. This recovery specifically helped the VLCC segment.
Russia-Ukraine War Intensifying Changes in Oil Trade Patterns
Meanwhile, there are massive, notable changes in trading patterns for the Suezmax due to the war in Ukraine.
Castor Group commented on the new trade dynamic, noting that the considerably high export volumes from the Middle East, West Africa and the US Gulf to Europe have led to an increase in Suezmax load and discharge locations globally since mid-June.
In addition, India’s growing imports of Russian crude oil are another plus for the Suezmax sector:
- According to data by Poten& Partners, Indian imports of Russian oil from the black sea have risen seven-fold in the first three months since Russia invaded Ukraine.
The oil trade between the two countries primarily benefits Aframax and Suezmax tankers, as the main export ports cannot accommodate VLCCs.
Since the Russia-Ukraine war started, Brazil also exported more oil to Europe: 532,000 barrels daily in May, compared to 180,000 barrels daily in 2021. These numbers come from data compiled by Braemar ACM Shipbroking. Suezmaxes predominantly serve this trade route.
With the Russia-Ukraine war in its fifth month, there is now greater clarity on changing trading patterns. This has boosted longer voyages or ton-mile demand and tankers’ freight.
Ton-mile demand is calculated by multiplying the volume of cargo moved in metric tons by the distance travelled (in miles). Covering a longer distance implies diminished availability of ships even if the total size of the fleet remains the same; conversely, it offsets the increase in the tonnage supply.
Sanctions on Russian oil have also led to increased oil export by the US. Kinder Morgan, which owns around 16 Jones Act vessels, recently revealed that day rates for vessels that move oil and refined products between US ports have improved since the ban on Russian oil.
European markets have seen a similar trend. Specifically, the ongoing geopolitical aggression along the Black Sea region has led to petroleum tanker rates climbing to record highs for routes originating in Europe.
Oil Market Predictions for the Rest of the Year
The volatility of the oil market makes predictions difficult. But what is the most likely scenario for this year’s third quarter?
In their recent Tankers Quarterly report, S&P Global noted that while clean tanker freight hit an all-time high in June for some routes and a 26-month-high for other routes, dirty tankers might also make gains in this current quarter.
“Clean tankers will remain strong due to a smaller order book for new ships, the imminent regulations on
carbon emissions, and the reorganization of the trade flows caused by sanctions on Russia,” said Enrico
Paglia, a Genoa-based research manager with Banchero Costa, or Bancosta.
The International Energy Agency, or IEA, foresees that the global oil demand will surpass pre-pandemic levels in 2023 at close to 102 million b/d. Shipping executives across the globe are latching onto such projections while painting a bright picture for tankers’ freight.
If the world avoids a recession, oil demand could peak in this quarter amidst the current low volumes in inventory – presenting the perfect conditions for a trade upswing in the oil market.
Specifically, Asia-Pacific tankers are likely to be firm in the third quarter of 2022, driven by changing trade flows which are leading to longer voyages amid the lingering Russia-Ukraine war and slow growth in the fleet.
“Tanker freight is in early stages of a cyclical recovery, which is likely to continue in the third quarter,
with strength gradually shifting from clean to dirty,” said Oslo-based Ole- Rikard Hammer, senior analyst,
oil and tankers, for Arctic Securities.
There are many moving parts in the current oil shipping market. With disruptions ranging from trade wars to a looming recession, each week presents a new challenge for analysts trying to make sense of the energy sector.
Calming the Volatility with Tankers’ Optimization
Oil shippers, charterers, and tanker companies must be proactive to navigate these uncertain times.
Analysts predict that tanker fleet growth will have slowed considerably by next year (running at a 25-year low due to historically low order books); therefore, that the deployment of tankers has to be precise going forward.
Consequently, tanker optimization (a tanker owner optimizing their fleet) is gaining traction as a viable approach to arrest volatility in energy markets.
Last year, International Seaways, one of the world’s largest tanker companies, announced a move to use tanker fleet optimization to maximize its performance.
An optimized fleet puts us in a better position to tackle the uncertain pandemic and future regulatory environment. It is a step to a more efficient fleet,”
said International Seaways at the time.
The company operates 97 owned ships. These include 13 VLCCs, 15 Suezmaxes, and 4 Aframaxes.
Sourcing the Right Tanker Optimizer
The key objective of any charterer or oil company is to ensure that they meet the forecasted demands at various ports and satisfy the port and vessel constraints.
The primary objective of the optimizer is to minimise costs. Hundreds of variables must be considered to plan a tanker’s voyage effectively, making manual planning an arduous task. Yet with an optimiser, you are one click away from performance-optimized tankers.
Solverminds Company is a global technology company which provides an optimization solution to allocate and schedule owned or time/spot-chartered tankers.
In the case of Solvermind’s Tanker Optimizer, the algorithms in the software mainly optimize for port and vessel constraints.
The ultimate goal is to have the company applying the optimizer reach an optimal use of their tanker fleet and achieve smarter scheduling, saving on time and costs.
How Tanker Schedule Optimization Can Assist
First, the optimizer plans for optimal terminal utilization during loading and can forecast production shortfalls at loading jetties.
This helps in choosing an alternative load site if required. The optimizer can also estimate supply-side constraints regarding quantity and cargo grade.
Scheduling to Minimize Cost
The second part is the actual scheduling of tanker vessels. The operation’s expected output is to minimise vessel operations’ costs.
A user of the optimizer can match oil deliveries from the loading site to demand locations with precision. Specifically, the optimizer creates vessels’ schedules with expected lay can date at the loading port, the loading date nominations, arrival load jetty, and arrival discharge jetty.
It will also identify:
- The number of the tanker vessel
- The type of tanker vessel
- The size of the tanker vessel
to time and spot charter and match it with constraints defined at the load and discharge ports.
Plan for Constraints at Load/Discharge Ports
The third part is on the discharge side. The optimizer will plan for optimal use of the oil terminals and jetty infrastructure at the discharge port.
By using several parameters, the optimizer can predict congestion at discharge ports and berthing window constraints and then choose the option of ship-to-ship transfer (if needed). A planner can even demand forecasts at the discharge port, allowing oil companies/charterers to allocate vessels efficiently.
Finally, all of this can be housed under one application and through the beauty of artificial intelligence (AI) and machine learning (ML).
Talk to the Solverminds Optimization team to discuss how oil companies and charterers can optimize their fleet and reduce costs.