Tanker shipping was one of the few winners amid the global rout in stock markets and oil prices seen during the first few months of this year, in the face of falling industrial activity and weak demand as the world came to terms with the coronavirus pandemic, says an article published in financial times.
Impact of the pandemic
Over the last few months, we have seen an explosion in tanker freight rates with the largest class of tankers, the VLCCs (Very Large Crude Carrier) making headlines as the uncertainty surrounding oil production and the impact of the pandemic has sent traders clamouring to book large tankers to store millions of barrels of crude acquired at rock-bottom, even negative prices.
VLCC fleet
With land-based storage facilities rapidly filling up, almost 10% of the world’s VLCC fleet was booked with the option of floating storage in the space of six weeks. As of late April, at least 160 million barrels of oil were estimated to be held in floating storage, mainly on VLCCs but also on some smaller tankers too.
It is not unheard of for tankers to be used for floating storage, back in 2009 over 130 vessels were being used to store cheap crude during a contango period. Again in 2015-2016 during the oil glut, there was a second wave of interest in floating storage with as many as 50 VLCCS used to store crude.
Difficulties
It is difficult pinpoint exactly how many tankers are currently being used to store crude, but satellite data shows around 70 VLCCs that are laden with cargo and have been stationary for over two weeks.
Other sizes of tanker have been booked floating storage too, not only for oil, but also for petroleum products (jet fuel and gasoline) But, aside from storage, traders have still needed to move oil across the world and spot prices were driven up as the list of available vessels dwindled relative to the massive supply in oil cargoes.
Add to this the logistical delays in port due to Covid-19 and the market was left with even fewer vessels readily available, the result was an explosion in tanker rates. Immediately after oil prices crashed in March VLCCs were being hired at daily rates of close to $280,000 per day to carry oil from the Middle East to America. Prior to the slump, charterers could expect to pay around $12,000 per day for a VLCC on the same route.
Result of this boom
The result of this boom in freight rates has played out in tanker companies’ results for the first quarter. Euronav, which owns one of the world’s largest fleets of crude oil tankers, saw its net profit jump by over 1,000% year on year to $226m during the first quarter and other publicly listed tanker owners have reported similar outcomes.
Falling oil prices have indeed been tanker markets gain so far this year, but what everyone wants to know is how long can these rates be sustained? In the short term, we expect to see a firm market for tankers for the rest of the quarter as crude stocks continue to build. It is likely that demand will not pick up until we see a gradual reopening of the global economy and therefore recovery in oil demand is expected to come back more robustly in Q3.
Looking further ahead, the expectation for the tanker market is that rates will begin to balance out as oil demand resumes but supply needs to slow down too. OPEC+ has agreed to limit supply but there are several members, such as Iraq who cannot afford to reduce output.
What Report Suggests
Reports suggest that Iraq, the organisation’s second largest oil producer, might be struggling to implement the production cut and if this glut continues then additional storage will be required. Equally lack of leadership in the EU to outline plans to restart the economy and concerns that a second wave of the virus could further impact global economies and therefore oil demand.
Whilst there is still momentum for the crude stock build to continue in the short-term, it is likely that crude stocks on shore and floating will peak in Q3, this will keep tankers buoyant as crude traders fill their reserves. A phased reopening of the global economy will kick-start a rise in oil demand by the second half of 2020, crude stocks will draw down and it is likely that the boom will be over by the end of the year with tanker markets facing very different prospects.
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Source: Financial Times
