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Re-Reading The IMO 2020 Crude Tanker Tea Leaves

Re-Reading The IMO 2020 Crude Tanker Tea Leaves

Expectations of an IMO 2020 spike in tanker rates are not just being subtly tempered on the product carrier side of the equation. There seem to be more caveats, at least between the lines, on the crude oil tanker front as well.

Third-quarter crude-tanker rate disclosures and commentary from executives of Teekay Tankers (NYSE: TNK) on August 1 echoed what was said the previous day on the product-tanker side by Scorpio Tankers (NYSE: STNG) and Ardmore Shipping (NYSE: ASC) – i.e., the IMO 2020 rule that caps fuel sulfur content at 0.5 percent starting January 1, 2020 is not yet affecting tanker rates.

Refineries are expected to hike throughput to produce the incremental ultra-low-sulfur fuel necessary to allow the global shipping industry to comply with IMO 2020. Vessels must start buying compliant fuel before the deadline, particularly larger ships on longer hauls, because the fuel tanks must be ‘cleansed' of high-sulfur fuel.

During a conference call with analysts, Teekay Tankers chief executive officer Kevin Mackay said that the timing of the switchover, whether to marine gas oil (MGO) or new blended products known as very low sulfur fuel oil (VLSFO), hinged on the vessel type.

"It depends on the class of ship," he explained. "For our Suezmaxes on much longer voyages, such as those on West Africa to China runs, we'd be looking at stemming [buying] the bunkers [marine fuel] in the late third quarter, early fourth quarter period. For Aframaxes, it would be more toward the back end of the year."

A Suezmax tanker is designed to carry 1 million barrels of crude oil and is generally booked on long-haul voyages; an Aframax can carry 750,000 barrels and does more local trips.

Crude tanker investor pitch

Anyone who has been to a shipping finance conference in the past two years knows just how important IMO 2020 upside is to the tanker industry investment thesis. It's the single most talked about subject on most tanker panels.

The investor pitch is that the fuel switch will add to crude oil tanker demand as refineries require more inputs and will add to product tanker demand as MGO and VLSFO components are repositioned to where they're needed around the world.

The original theory was that the IMO 2020 effect would be apparent in tanker rates in July. If the switchover starts in late September, the MGO and VLSFO would have to be in position at refueling facilities by then. Before that, these volumes would have to be ordered by a marine fuel supplier, produced by a refinery, and shipped from a refinery to the marine fuel supplier.

If there was a significant volume of such transactions, refineries would need incremental crude inputs shipped in via crude tankers.

It can take a month and a half or more to move crude oil between the Atlantic and Pacific Basins – thus the popular theory about IMO 2020 showing up in tanker rates at the beginning of the second half, and consequently, today's jitters because crude tanker rates are down.

If tanker rates are not moving up, it begs the question: Is this because lower global demand is offsetting the IMO 2020 effect, or are bunker fuel suppliers not preemptively ordering significant quantities of MGO and VLSFO? If they aren't, what happens when the regulatory deadline strikes, only five months from now?

Teekay Tankers' Aframaxes earned average rates of $20,000 per day in the second quarter. Its Suezmaxes earned $17,000 per day. In the third quarter, revenue days booked to date for its Aframaxes are averaging $12,800 per day and its Suezmaxes are averaging $15,600 per day.

There was a difference in the IMO 2020 wording in the first-quarter presentation of Teekay Tankers released on May 23 versus the second-quarter presentation on August 1. On one hand, parsing an investor presentation as if it's the Fed minutes could be taking things too far, but on the other hand, investor relations departments pay attention to nuance – and given the overall importance placed on the ‘IMO 2020 effect' by investors, any change in tone is important.

The May 23 presentation asserted that "IMO 2020 is expected to be a positive demand event from the second half of 2019 onwards," leading to "higher refinery runs and increased crude throughput," "new trading patterns" and "floating storage." It referred to a "seasonally weaker" second quarter but made no reference to seasonal weakness in the third quarter.

The August 1 presentation doesn't include the same IMO 2020 language as early in the slide deck and instead refers to "seasonal weakness at the start of the third quarter." Later in the slide deck it stated that "IMO 2020 could lead to new trade patterns, arbitrage movements, floating storage and increased congestion."

During the conference call, Teekay Tankers research director Christian Waldegrave explained, "What we saw in the first half of the year that spilled over a little bit into the early part of the third quarter was some very heavy refinery maintenance, and that period of maintenance is coming to an end."

He continued, "We also saw some pretty low refining margins in the second quarter, especially in Asia, and that led to some very low refinery throughput, which flowed through to lower tanker rates in the third quarter. But refining margins in Asia have now recovered."

According to Waldegrave, "We feel fairly confident that refinery throughput is going to be significantly higher in the second half of the year versus the first half of the year, and that should provide extra tanker demand."

He added, "We haven't seen the IMO 2020 bump yet, which we still think will come in the second half of the year, because refineries will have to start going at fairly high utilization levels in order to produce sufficient low-sulfur diesel."

Teekay Group financial results

Teekay Tankers is part of the Teekay Group; all of the group's entities reported financial results on August 1. The parent company, Teekay Corp (NYSE: TK) earns revenue from its own fleet as well as its stakes in two daughter entities – Teekay Tankers, which is a corporation, and Teekay LNG (NYSE: TGP), which is a master limited partnership.

Teekay Tankers reported an adjusted net loss of $12.1 million for the second quarter of 2019, compared to an adjusted loss of $28.7 million in the same period in 2018. Adjusted losses per share of $0.05 in the latest period topped analyst forecasts for a loss of $0.08 per share.

Teekay LNG reported adjusted net income of $34.4 million, in line with analyst estimates and up substantially from $13.5 million in the second quarter of 2018.

Parent Teekay Corp reported an adjusted net loss of $13.4 million, compared to an adjusted loss of $21.6 million in the second quarter of 2018. Additional ocean shipping stories from FreightWaves by Greg Miller

Image Sourced by Pixabay


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