The world's oil spigot cannot be turned off fast enough, and petroleum no one needs is now pouring into tanker cargo holds like rainwater into buckets under a leaky roof.
Plunging oil demand has precipitated surging tanker demand. As the saying goes, "One man's misfortune is another man's fortune."
Shares of crude-tanker owners Nordic American Tankers Limited NAT were up 20% as of midday Monday, with Frontline, Ltd. FRO up 10%, DHT Holdings, Inc. DHT 9% and Euronav NV EURN 7%.
Shares of product-carrier owners Ardmore Shipping Corporation ASC and Scorpio Tankers, Inc. STNG were up 11% and 6%, respectively.
In the mixed-fleet category, Tsakos Energy Navigation Limited TNP was up 15%, Navios Maritime Acquisitions Corporation NNA 12%, Teekay Tankers Limited TNK and Teekay Corporation TK 10%, Diamond S Shipping Inc. DSSI 9%, and International Seaways, Inc. INSW 7%.
Product tanker bonanza
Long Range 2 (LR2) product tankers, which have capacity of 80,000-119,999 deadweight tons (DWT), are earning an unprecedented $165,000 per day, according to Clarksons Platou Securities. The previous record of $80,000 per day was set all the way back in 2001.
An LR2 has the same capacity as an Aframax tanker that carries 750,000 barrels of crude oil, yet an LR2 is now earning essentially the same rate as a very large crude carrier (VLCC), which has the capacity to carry 2 million barrels of crude.
LR1 product tankers (55,000-79,999 DWT) are earning $110,000 per day versus the prior record of $65,000 per day; medium-range (MR) product tankers (25,000-54,999 DWT) $75,000 per day versus a previous all-time high of $43,000 per day; and Handysizes (10,000-24,999 DWT) $90,000 per day versus the former peak of $65,000 per day.
"Physical land-based refined-product storage capacity is effectively full, but refineries are by and large still refining," explained Stifel analyst Ben Nolan. "That means that ships full of gasoline, diesel, jet fuel, naphtha, etc. cannot discharge and are piling up outside import terminals, but refineries with no storage capacity still need the export relief valve and are paying virtually anything for the much-compressed tanker capacity. As a result, product tankers are earning more than they have ever."
Frode Mørkedal, managing director of research at Clarksons Platou Securities, explained how unusual the lofty product-tanker rates are. "Tightness in the VLCC market typically spreads quickly across the large crude-tanker sector given that there are far fewer loading and discharge ports for VLCCs and Suezmaxes [tankers with capacity to carry 1 million barrels of crude].
"Product carriers trade actively across a wide array of ports," he continued. "Usually there can be pockets of tight supply and areas with excess ship availability, which keeps rates generally bifurcated by region.
"In today's market, however, MRs and Handys, and of course LRs, are being tasked with moving cross-hemisphere as charterers reroute cargoes, given that ports are increasingly unable to accept ship calls without meaningful delays. This is causing even tighter supply as ships are being used to travel longer distances, are being used for storage and are increasingly trapped at port waiting for discharge," said Mørkedal.
The storage shortfall ultimately means that refineries will have to shut down capacity — and many are now doing so. But according to Nolan, "those refineries closest to the coasts with export markets as a relief valve are less likely to close [than inland refineries], so we could be in a structurally very strong product-tanker market for some time."
Crude prices falling back again
With product-carrier capacity being overwhelmed by excess refinery output, it goes without saying that refineries do not need more crude inputs. Crude cargoes that have already been loaded aboard tankers are increasingly stuck, unable to unload.
The price of crude oil is a visible indicator of the supply-demand mismatch. Crude-oil prices rebounded from historic lows in the second half of last week on news of production shutdowns and escalating U.S.-Iran tensions (a military conflict that closes the Strait of Hormuz would be the equivalent of a massive production shutdown).
Oil has now resumed its steep slide. In midday trading on Monday, the WTI May contract was down 29% to $12.03 a barrel and the Brent May contract was down 10% to $19.28 per barrel.
Declining crude prices create a wider contango — the spread between the spot price and the forward price for the commodity — making it more attractive to charter tankers and use them as floating storage in a "buy-low, sell-high" trading strategy.
According to Randy Giveans, analyst at Jefferies, "Last week, the U.S. Energy Information Administration reported that 60 million barrels of Cushing's 76 million barrels of storage capacity [in Oklahoma] was filled, or around 80% of capacity, while traders noted that any remaining space has already been contracted out. Similar stories are being reported in India, Canada, the Caribbean, Europe, South Korea and Singapore.
"As such, we believe the steep contango in Brent crude prices will continue due to COVID-19 demand destruction, which will further support floating storage demand and tanker rates." Click for more FreightWaves/American Shipper articles by Greg Miller
Photo credit: Port of Houston
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.