All eyes turn to timing of tanker rate resurrection

Frontline tanker

Crude tankers are seeing “classic signs of recovery.” “Newbuilding orders are extremely low. We have the lowest orderbook is in 25 years.” On the product-tanker side of the equation, “refineries are shutting down so products are being shipping from further away, which is very interesting from a ton-mile point of view.”

Those quotes are from a shipping conference in New York in 2011, a full decade ago.

A few quotes circa-2017: “New capacity additions for global refineries are set to double, a positive for global volumes and product tanker demand.” Crude tankers should see “an asset and rate recovery in 2018 and beyond.” Given pending regulations, “the number of tankers sent for demolition will increase.”

The song remains the same in 2021. That doesn’t mean a major recovery won’t come to pass this time around. Hopeful quotes with a very familiar ring should always be taken with a grain of salt, but given unprecedented pandemic effects, market conditions are very different now than in the past. 

The question — as in the beginning of every previous year since the 2009 global financial crisis — is: When will the still-hypothetical, sustainable tanker recovery, not just brief spikes, finally arise? Recovery timing was addressed on Friday’s Frontline (NYSE: FRO) conference call, on the call the day before by Scorpio Tankers (NYSE: STNG) and during a virtual forum presented by Capital Link earlier in the week.

Contrasting views on recovery

The super-bullish view was voiced by Clarksons Platou Securities analyst Omar Nokta at the Capital Link event.

“We think there are roughly 5 million barrels missing from the [seaborne] market today and we know there’s going to be a handful of million barrels coming as we proceed through the year. We already know the sector is very sensitive to just a million barrels, which leads to huge volatility. Now, imagine a million followed by another million followed by another million,” said Nokta.

“You’ve got the whole supply equation working in your favor with the lack of newbuildings and all the retrofits required to adhere to new regulations. Supply will be extremely tight and you’ve got demand that’s about to go bananas.”

Evercore ISI analyst Jon Chappell voiced a different view on the Scorpio call. “If there is 5 or 6 million barrels of demand growth this year, what I’m trying to understand is the extreme optimism about the pace or magnitude of the recovery,” he said.

Chappell pointed to demand estimates of “super-bullish oil analysts” calling for a 7.6 million barrel per day increase over 2021-2022. He pointed out that this “is up against an 8.7-million-barrel decline in 2020. So, we’re looking at a 2022 demand number that’s lower than 2019.”

Tanker vessel capacity gains are slowing, but still inching up. So, Chappell wondered: How does that jive with such extreme optimism?

Crude versus product tanker recovery

Responding to Chappell’s question, Scorpio Tankers President Robert Bugbee said that oil analysts are looking at the recovery in crude oil demand, but it’s a different equation for product tankers.

He pointed to shutdowns in refineries that will increase the average voyage distance of product cargoes, increasing ton-mile demand. “For us, it’s how much product is going to be used in the world, and where it’s being shifted to. The ratio of products carried by sea is going to increase by a far higher rate than that of crude oil in this recovery,” he argued.

Frontline operates both crude and product tankers. Lars Barstad, Frontline’s interim CEO, was asked which he thought would recover first: crude or product tanker rates?

 He replied, “I am unsure which segment will be hit first when the recovery story starts to come true. Potentially, the VLCC market [very large crude carriers; tankers that carry 2 million barrels of crude oil]. Eventually, you will need refinery runs to increase for products to flow. And the start of any return of volume will come from the Middle East, which would benefit VLCCs first.”

Floating storage hangover over

Tanker earnings have been weighed for months by floating storage. As floating storage unwinds, tankers come back into the spot market, a headwind for rates.

The good news is that it appears that the downside from floating storage is largely over. “There’s almost on storage of products on the water. That has been drawn down,” said Bugbee.

On the crude-tanker side, Barstad explained, “During Q4 2020, inventories drew down at a record pace of 2.6 million barrels per day. Oil demand rose to levels near 10 million barrels per day above Q2 2020 levels and the structure of the oil market incentivized players to empty tanks, both floating and on land, as the future price was increasingly lower than the prompt price, making it uneconomical to hold stocks.

“Floating storage is no longer a significant factor weighing on the tanker market,” affirmed Barstad.

Data provided to American Shipper by commodity intelligence company Kpler reveals that crude tankers idled for 12 or more days held a total of 70 million barrels as of Wednesday, roughly the same as the level at the same time in 2020 — before the COVID-induced floating-storage situation ensued.

tanker storage data
(Chart: American Shipper based on data from Kpler)

Tanker stocks anticipate future recovery

Tanker rates are still in the gutter, but tanker equities are moving up in anticipation of higher rates ahead. Crude and product tanker stocks had another solid day on Friday. Scorpio rose 6.9% and Euronav (NYSE: EURN) gained 4.5%. Overall, tanker stocks are up double digits since the beginning of this month.

“The share market is pricing in the recovery a little bit further out, obviously jumping over the insecurity in the front,” said Barstad.

Chappell upgraded Frontline from “Underperform” to “In Line” on Friday because “the fundamental outlook has reached its inflection point and Frontline is unlikely to continue to underperform as rates and assets values emerge from the abyss. With crude-tanker rates bouncing along a deep prolonged bottom [there is] only one way to go from here.”

The caveat, Chappell warned, is that “a return to profitability [for tanker names] may not occur until Q4 2021.”

On Feb. 15, Cleaves shipping analyst Joakim Hannisdahl abruptly flipped his ratings for almost all of the tanker names under his coverage from “Sell” to “Buy.” Hannisdahl said, “While we see earnings lackluster until Q4 2021, we think asset and share prices have bottomed out.”

He cited “early signs of a massive capital injection into the segment” that prompted him to upgrade the segment “a few months ahead of schedule.”

Tanker earnings roundup

On Friday, Frontline reported a net loss of $9.2 million for Q4 2020 compared to net income of $108.8 million in Q4 2019. The adjusted loss per share of 7 cents came in below consensus expectations for a loss of 5 cents.

According to Barstad, “We expected some degree of normal seasonality to kick in, but this time around the fourth quarter proved to be softer than Q3. Actually, that’s the first time that’s happened in 10 years.”

For Q1 2021, Frontline has booked 78% of its VLCC days at an average of $22,600 per day, 68% of its Suezmaxes [tankers that carry 1 million barrels of crude] at $22,600 per day and 65% of its LR2 product tankers [vessels with capacity of 80,000-119,999 deadweight tons or DWT] at $12,200 per day.

On Thursday, Scorpio Tankers reported a net loss of $76.3 million for Q4 2020 compared to net income of $12 million in the same period the prior year. The adjusted loss per share of $1.04 came in a sliver better than consensus expectations for a loss of $1.05.

For Q1 2021, Scorpio has booked 48% of its LR2s at $15,200 per day, 58% of its LR1s [55,000-79,999 DWT] at $11,000 per day, and 58% of its MRs [25,000-54,999 DWT] at $11,500 per day.

According to Stifel analyst Ben Nolan, “While the timing of the recovery is uncertain and the tanker market could continue facing near-term headwinds, we believe the eventual upside is there for Scorpio Tankers shares from current levels.” Click for more FreightWaves/American Shipper articles by Greg Miller 

MORE ON TANKERS: Crude tankers stuck in ‘rate hell’ but floating storage wanes: see story here. Tanker recovery still distant prospect after Saudi surprise: see story here. Frontline’s disappearing dividend speaks volumes on tanker fears: see story here. Tanker shipping at risk of rare winter hibernation: see story here.