Hard to believe it’s only six months since we reported the sanctions driven “super-spike”, and harder still to think it’s only six weeks since the collapse of OPEC+ talks took rates back to “heroic” levels! As tanker owners now try to weigh up the huge imbalances building in the energy markets and exactly how much oil the world needs to store afloat, this week’s Analysis reviews an extraordinary tanker market run.
Chartering Confusion…
Back in early October we were reporting the highest ever tanker earnings (our average VLCC spot index hit $300,000/day) as confusion around the extent of US sanctions on the largest tanker owner (3% tankers, 5% of VLCCs) sent the market into a frenzied scramble for tonnage. Underlying market improvements, seasonal demand, long-haul trade, vessels in storage and off hire for scrubber installation then helped keep rates at healthy levels for much of the winter. Our under retrofit data peaked at 2% of all tankers and 3% (25 vessels) of VLCCs: we now estimate this has fallen to 0.7% of the tanker fleet and 1% (6 units) for VLCCs.
Output Boost…
Despite initial optimism, the tanker market started 2020 in fairly sluggish fashion: VLCC spot earnings averaged $26,525/day in February. While Covid-19 concerns were building, that all changed with the unexpected collapse of OPEC+ talks in early March as the promise of additional Middle East oil supply helped VLCC earnings surge back to $279,000/day (the second highest earnings on record!).
Storing Up Cash…
In recent weeks rates have remained strong but the focus has shifted again as the tanker market tries to digest unprecedented developments in the oil markets: rapidly developing imbalances; a 20m bpd (!) drop in global oil demand expected across Q2; OPEC+ supply cuts / G20 policies; compliance with these cuts; implied 1.4bn bbl stock build in Q2; generational lows in oil prices; price contango; the true nature of onshore storage capacity. Storage demand has been a market feature for some time but this move is dramatic: since start March we estimate storage more than doubling from 95m bbls to 257m bbls / 39m dwt / 6% of all tanker capacity (excluding 50m bbls / 7.2m dwt of “dedicated” storage). For the VLCC fleet, we estimate 39 have moved into storage use, taking the total to 153m bbls / 24.6m dwt / 9.8% of the fleet (31m dwt / 101 vessels incl. dedicated). This is fast-moving and keeping track is tricky, we are reviewing: vessels stationary and laden; location & fixture history; last refinery call. Data includes rising numbers of product tankers (>c.40m bbls); LNG/LPG plays may develop.
Cash Is King…
In such uncertain and extraordinary times, the cashflow is welcome (we also have all time highs for clean products earnings this week: including $167,000/day for LR2s on AG-Japan, double the previous record!). At the moment brokers estimate the VLCC 1 year TC rate at $65,000/day, compared to a current spot TCE of $167,000/day. Reduced trade (including deep q-o-q moves) may impact eventually: for the moment it feels like storage demand will mitigate, and that continued disruption while the surplus is managed may soften any “wind down”. What a remarkable six months! Continued best wishes from Clarksons Research.
The author of this feature article is Stephen Gordon. Any views or opinions presented are solely those of the author and do not necessarily represent those of the Clarksons group.
