Product Tanker Market Set for Prolonged Strength on Tight Supply, Guotai Haitong Says

The global product tanker market is positioned for a sustained period of elevated earnings that could exceed current expectations, driven by inelastic vessel supply and lengthening trade routes, according to a new research report from Guotai Haitong. The firm initiated coverage on the sector with an "Add" recommendation, citing a favorable outlook for several years.

Supply Constraints to Underpin Rates

A key pillar of the bullish thesis is the constrained supply of new vessels, which analysts expect to remain tight. The report highlights several factors creating a rigid supply environment:

• Low Orderbook: The current orderbook for new product tankers stands at 22% of the existing fleet, a level described as historically low.
• Aging Fleet: More than 20% of the current fleet is over 20 years old, a common age for scrapping. Nearly another 20% of the fleet will surpass that age within the next three years.
• Limited Shipbuilding Capacity: Shipyards are reportedly booked with orders for other vessel types, with new building slots for tankers largely unavailable until after 2030.

These factors combined suggest that the global fleet of compliant, modern tankers is unlikely to see significant growth in the medium term, providing strong support for freight rates.

Shifting Trade Routes Boost Demand

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On the demand side, the report points to a fundamental reshaping of global trade that is increasing average voyage distances, a key metric known as tonne-mile demand. A primary driver is the ongoing closure of refineries in Europe and Australia, forcing these regions to source refined fuels like gasoline and diesel from more distant producers in Asia and the Middle East.

This structural shift has already pushed global product tanker tonne-mile demand more than 20% above 2019 levels, according to Guotai Haitong. The trend is expected to continue as Europe plans further refinery shutdowns before 2030. The rerouting of Russian fuel exports following international sanctions is also contributing to longer, less efficient voyages.

Market Outlook

In the short term, the report notes a rapid recovery in Asian trade is already lifting the market. Rates for Medium Range (MR) tankers on eastern routes have recently climbed from below $30,000 per day to a range of $40,000 to $50,000 per day. This is attributed to the issuance of Chinese export quotas and strong regional restocking demand.

While the market saw some softness in the second half of 2024 from new vessel deliveries, Guotai Haitong believes the powerful long-term supply and demand fundamentals will support a high-rate environment that is more sustainable than the market currently anticipates. This provides potential for both strong earnings and an expansion in the valuation of tanker-owning companies.