Seems Oil and Water Do Mix After All

Plummeting demand for oil caused by lower economic activity during the coronavirus pandemic has resulted in a shortage of storage space for the high quantities of oil being produced. And when land based oil storage becomes filed, the only place left to store oil is tankers.

Oil prices have been plunging recently, despite Members of OPEC and allies (OPEC+), having agreed to a historic production cut of 9.7m barrels of crude oil per day to reduce the massive production overhang and set a price floor to limit the fall in oil prices. The reason behind the continues decrease in oil prices lies in the current demand shock of unprecedented scale caused by the shutdown of most economies worldwide, something which the IMF refers to as “the Great Lockdown”.

WTI Oil Price (USD/barrel)

Demand for oil has fallen so severely, and at such pace, that there is little space left on land to store the crude made redundant by the coronavirus crisis. Due to the lack of land storage, oil traders have been increasing their demand for floating storage, which means renting an oil tanker for the purpose of holding the cargo until oil prices improve.

The increase demand for tankers intended to be used for storage started off back in March when oil prices decreased enough for big energy traders to be able to take advantage of a market structure called contango, a situation where the futures price of a commodity is higher than the spot price. By buying oil cheaply now and selling at a higher price in the future market, traders can make money as long as the difference is greater than the cost of storage.

As a result, tankers are in great demand, which caused their spot prices to skyrocket. Spot prices for VLCCs set a new record after Egypt’s national oil company provisionally agreed to charter a vessel for USD 356,798 per day last week. Meanwhile, the chaos in the crude markets is spilling into product tanker markets, with earnings now above USD 150,000 daily for aframax-sized vessels. Rates for long range tankers doubled in two days on benchmark routes, while medium-range tankers plying transatlantic trades are 186% higher than last week, at nearly USD 88,000 daily according to the Baltic Exchange.

Baltic Exchange Clean Tanker Index

Time charters have also been growing since the beginning of the year but with a slower pace. One year time charters for VLCC are up 49% since the beginning of the year, while MR rates are up 4%. Note that MR rates are close to their 2015 levels.

Tanker Time Charter Estimates (USD per day)

wdt_ID Size 1 Year 2 Year 3 Year 5 Year
1 HANDY 14.000,00 14.000,00 15.000,00 14.000,00
2 MR IMO3 17.750,00 15.000,00 18.500,00 17.500,00
3 LR1 25.000,00 18.500,00 20.000,00 19.000,00
4 LR2 35.000,00 25.000,00 28.500,00 25.000,00
5 AFRA 35.500,00 23.500,00 27.500,00 23.500,00
6 SUEZ 50.000,00 33.000,00 37.500,00 32.500,00
7 VLCC 67.500,00 40.000,00 50.000,00 42.500,00

Source: Alibra Shipping

Looking ahead, announced reductions in crude exports and a sharp cutback in refinery runs in the face of a massive collapse in end-user demand for products present a considerable downside risk for the tanker market from May onward. Furthermore, the question remains what type of consumer behaviour we might expect after things start to normalize, thus adding some more uncertainty to the outlook. However, in the short run, with onshore commercial storage filling up, demand for floating storage for both crude and products will likely provide support to the market over the coming months.

Impact on the Croatian Market

Tankerska Next Generation is expected to benefit from the current market situation, however to a certain extent. The reason for this is that TNG focuses their vessel employment on time charters which produce steady cash flows, thus reducing the risk of market uncertainties. As a result, most of their vessels are already employed through time charters with an extension option. However, one should note that current time charters are near their 2015 levels meaning that a solid result can be expected either way.

Filip Gracin
Category : Blog

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