It is the best of times; it is the worst of times. Just as spot freight rates for supertankers have reached epic new heights, crude-tanker stocks are plummeting.
Rates for very large crude carriers (VLCCs; tankers that carry 2 million barrels of crude oil) have in some cases topped $300,000 per day, driven by demand from Saudi oil shipping company Bahri.
"Although we are certainly at very high levels, the market could continue to go higher in the short term," asserted Frode Mørkedal, managing director of research at Clarksons Platou Securities. He believes the current VLCC market is "much stronger" than the market in October 2019, when rates previously spiked.
Some analysts believe publicly listed VLCC owners are an ideal hedge and safe haven during the coronavirus-induced stock-market crash. Alas, they were not a haven Monday, at the very time record-setting VLCC employment contracts were finalized.
Investors are "throwing out the baby with the bath water," Jefferies analyst Randy Giveans told FreightWaves. "Either investors are selling anything energy, don't believe the Saudi/Russia oil war will last long, or that global demand will remain very weak in the coming quarters, if not years, and that inventory building will be quickly replaced by inventory stocking.
"We disagree with what the market is doing today," said Giveans, who pointed out that "most of these tanker companies could earn more in EBITDA [earnings before interest, taxation, depreciation and amortization] in the month of April than in all of 2018."
Concerns Over Demand And US Production
Longer-term issues for crude-tanker rates were raised on Monday by Stifel analyst Ben Nolan, speaking during the Virtual Investor Forum hosted by J Mintzmyer on Value Investor's Edge via Seeking Alpha.
"Right now, you couldn't ask for a better layout for crude tankers," Nolan said. "Tanker companies are making money hand over fist, but it's being driven by the supply side — the supply of oil and the supply of ships. It's not indicative of underlying demand, which is a problem.
"We were cautious on oil demand even prior to coronavirus," he continued. "Global demand was softening a lot faster than people had thought and this [outbreak] is expediting that process. There are estimates that oil demand could be down by about 10 million barrels per day [due to coronavirus]. That's 10% of demand. That's stunning.
"When all the oil-supply and ship-supply elements are worked through, what are we left with? So, we're very positive on the tanker market in the immediate term, but you definitely want to keep your finger on the trigger in terms of selling these stocks because when it rolls over, it could potentially roll over really hard."
Another risk going forward: A significant portion of incremental tanker demand growth relates to longer voyage distances as the U.S. exports more crude oil to Asia. Vessel demand is not measured in tons, it's measured in "ton-miles" — volume multiplied by distance.
The collapse in crude-oil pricing could put a lid on U.S. production and exports, Nolan believes. "Already companies have begun to reduce their capex [capital expenditures]. These wells deplete quickly, so if you're not constantly drilling and spending money, the decline in U.S. production could happen fast. Our internal view is that we will reach ‘peak oil' [production] for the U.S. in 2021. But it's certainly possible [due to the price drop] that it could be this year. And after that happens, we're not expecting any incremental ton-miles." [crude tanker demand from U.S.-Asia exports]."
Disparity Between "Last Done" And Average Earnings
There are other caveats to the new $300,000-per-day VLCC rate record, as well.
When fixtures (charters) are first reported, they are "on subjects" or "on subs," meaning that an agreement has yet to be reached; it's more of an option. When the contract is finalized, the deal is considered "fully fixed."
The extremely high rates reported on subs are driving much of the excitement around VLCC rates. As of Monday, data from the Tankers International (TI) commercial pool was showing a rising number of deals on subs failing to be converted to finalized fixtures. TI was reporting six fixture failures, up from one on Friday.
Meanwhile, even if a day rate of $300,000 is finalized for a VLCC, very few other VLCCs will achieve that rate.
A portion of the fleet is on long-term time charters and will therefore miss out on some or all of a rate spike. And most of the VLCCs not tied up on time charters are not available to bid on today's spot contracts because they are on the fronthaul or the backhaul of spot contracts signed before rates skyrocketed (a round-trip VLCC voyage can take three months). A month ago, VLCC rates were just over $20,000 per day.
Even for owners whose ships do happen to be in position to lock in those rates, there is a major "lag effect" before the numbers pass through to quarterly results. Today's rates will be booked in the second quarter, which won't be publicly reported for another four to five months.
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