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Global crises and geopolitical chaos are bad for most businesses. The focus at Marine Money’s New York Ship Finance Forum on Thursday was on the worsening global energy crunch, the war in Ukraine, looming sanctions on Russia, the evolving situation in China — and how phenomenal the rate outlook is for tankers carrying crude, refined petroleum products and liquefied natural gas, reports Freight Waves.
‘The party hasn’t even started yet’
The sweet spot for rates is when disruptions are severe enough for inelastic vessel capacity to fall behind demand, but not so severe that demand is destroyed and the global economy melts down. Bad news is good news, until it gets too bad.
“The market likes chaos and dislocations,” said Bart Kelleher, CFO of Ardmore Shipping (NYSE: ASC).
According to Scorpio Tankers (NYSE: STNG) President Robert Bugbee, “The party hasn’t even started yet. The host may be drinking a couple of drinks but nobody has come yet. They are at the pub, waiting to go to the party later. The stress hasn’t even begun to be put on the product-tanker market.
“What we are worried about and I’m sure some of the other people here are worried about is that this gets too good,” said Bugbee. “This could get crazy. We cannot do the mathematics now to get required [future] demand for products to match the ships able to transport it.”
On the geopolitical front, the Russia-Ukraine war has been a boon for tankers. One moderator asked a tanker panel: “Do you have any concerns on the horizon — maybe [Russian President Vladimir] Putin concedes?”
But geopolitical chaos, like the energy crunch, is only good for rates if it doesn’t go too far. LNG shipping panelists warned of dire consequences in the event of a China-U.S. war.
“If that happens we’re all screwed,” said Oystein Kalleklev, CEO of Flex LNG (NYSE: FLNG). “It’s almost not even worth worrying about because the consequences are so big. Russia and Ukraine would look like a small bump in the road compared to what would happen. You would have an energy shock like you’d never seen before. The whole world economy would stop. It would be like the Great Depression.”
‘Worst energy crisis since 1979-1980’
Average spot rates for very large crude carriers (tankers that carry 2 million barrels of crude) are now above $100,000 per day. Bugbee said one of Scorpio’s product tankers was just booked at $98,000 per day. Average spot rates for tri-fuel, diesel-engine LNG carriers are now over $450,000 per day.
The more that different parts of the world fall short of energy, the higher the demand for shipping to balance out supply. That’s good for tanker owners — until the supply of energy maxes out and consumer and industrial demand is destroyed by high prices.
“We now have the worst energy crisis since 1979-1980,” said Francisco Blanch, head of global commodities at Bank of America Securities.
“Back then, we had a global oil crisis. Today, we have a crisis in gas and power markets. For the most part, it’s local prices; as people like to say in financial lingo, it’s a ‘glocal’ crisis. It hit China a year and a half ago and Europe a year ago. And unfortunately, I think it is heading straight to the U.S. Northeast.”
Utilities in New England depend on LNG. Import prices have skyrocketed due to war-driven demand in Europe. Furthermore, many New Englanders use heating oil. “Northeast inventories of heating oil are the lowest ever coming into this winter,” said Blanch. “All they can do now is first, pay, and second, pray for warm weather.”
Globally, he said, government strategic oil stocks are the lowest ever and commercial storage is also low. Spare oil production is limited. “When you don’t have inventories and you don’t have spare capacity, any incremental upward demand swing has to be met simply by higher prices and lower demand. You have to restrict demand,” he said.
Fight for LNG to heat up in 2023
Countries are bidding against each other for supplies of LNG and petroleum products. The losing bidders fall short of energy. The shipowner transporting cargo wins either way, providing a vital service for end consumers (and for cargo shippers, who profit even after paying often exorbitant freight).
Gordon Shearer, senior adviser of project development at Poten & Partners, said, “India, Pakistan and Bangladesh made big bets that they could buy LNG at spot prices, and they’ve taken the brunt of this swing in price driven by Europe. We’ve seen demand destruction and blackouts in Pakistan and Bangladesh and cargoes being diverted away from India.”
Competition for LNG supplies will heat up even further next year. According to Jason Feer, global head of business intelligence at Poten & Partners, Europe was able to fill its inventories this winter “because they had piped gas from Russia for four to five months” in addition to LNG imports. Plus, they didn’t face as much competition from China, where imports dropped 20%.
