The day before the surprise OPEC+ crude-production decision, Lars Barstad, interim CEO of tanker owner Frontline (NYSE: FRO), pointed to estimates that up to 1.5 million barrels per day (b/d) of output might return. If so, that could lead tanker markets “to tighten up quickly” and “be a trigger to sentiment … and give owners the gumption to say, ‘Rates are negative so I’m going to hold back.’”
Barstad was addressing the virtual Annual Capital Link International Shipping Forum, along with other top tanker execs. Hugo De Stoop, CEO of Euronav (NYSE: EURN), told attendees he expected the OPEC+ decision to be “the first signal” of the coming demand recovery.
Harrys Kosmatos, corporate development officer of Tsakos Energy Navigation (NYSE: TNP), compared tanker owners to “sprint runners before the 100-meter final in the Olympics. We’re in our lanes, doing our jumps and warmups. We’re positioning ourselves to hear the gunshot. We could have the customary false starts, but eventually the sprinters will start running.”
Cue the latest false start: Thursday’s OPEC+ decision. Alas, tanker owners — cartel production hopes now dashed — will be bleeding cash for even longer than they thought.
The analyst consensus was that OPEC+ and Saudi Arabia individually would bring 1 million-1.5 million b/d of production back online starting next month. Instead, OPEC+ will hold production flat and Saudi Arabia will continue its voluntary 1 million b/d cut.
Even worse for tanker demand, Argus Media reported that Saudi Arabia is not going to bring its production back all at once starting in May. Rather, it would phase production back in “gradually,” and “not in a single month.” Oanda analyst Edward Moya dubbed Saudi Arabia’s decision “shocking.”
Fearnleys Securities said on Friday, “For the tanker market, the move from OPEC+ is likely to keep rates at very challenged levels for now as volumes will continue to lag pre-COVID levels substantially.”
According to Clarksons Platou Securities analyst Frode Mørkedal, “Brokers report that sentiment among owners took a hit yesterday [Thursday] from the OPEC+ decision to maintain output for another month.”
In other words, Barstad had hoped the OPEC+ decision would give owners more “gumption.” Instead, they have even less.
Heavily loss-making rates
Crude-tanker Q1 2021 financial results are shaping up to be historic for all the wrong reasons.
Clarksons assessed Friday’s time-charter equivalent (TCE) rates for VLCCs (very large crude carriers; tankers that carry 2 million barrels of crude oil) at $4,400 per day. On the benchmark Middle East-China route, Clarksons put the average rate at a fresh low of -$100 per day.
There are two kinds of breakeven rates for tankers: “all-in” breakeven and “opex” breakeven. All-in breakeven includes all costs, including debt payments and interest expenses. Opex breakeven doesn’t cover finance charges; it only covers operating costs for expenses such as crew, stores, spares, management fees and insurance.
Breakevens vary from company to company. But analysts ballpark VLCC all-in breakeven at around $22,000-$25,000 per day and opex breakevens at around $7,000-$10,000 per day.
VLCC rates have been at or below all-in breakeven for the past eight months. They have been at or below opex since late January.
Everything below all-in breakeven equates to a loss for shipowners (and their investors). Yet the recent negative TCE rates point to a new level of pain.
Shipowners pay for fuel in a spot voyage. TCE rates are calculated net of fuel, assuming the use of 0.5% sulfur fuel oil. A negative TCE rate implies the tanker owner paid more for a voyage’s fuel than it received from the charterer to transport the oil.
Supertanker speeds should slow
Mørkedal noted that the OPEC+ announcement, by hiking the price of oil, will increase the price of marine bunker fuel. This should compel tanker owners to slow down on ballast (unladen) legs to conserve fuel.
“With earnings so low on many routes, [higher bunker prices] may translate into an increase in freight levels simply to maintain positive or opex-level voyage earnings,” he explained. “With no lifeline from OPEC, we think tanker owners should cut speed, which lowers the direct fuel costs and lifts TCE earnings,” he said. He added that this would also “help tighten the supply of vessels.”
According to De Stoop, some of the shipbroker reports on TCE rates are wrong, because they assume fuel consumption based on too high an average speed. Thus, reported TCE rates may be too low.
“There is no reason to hurry up to a negative-return market. When we see the average speed computed by some of the brokers — this is a shame. People don’t understand economics. Consumption is exponential. So, if you reduce your speed by 1 or 2 knots, there is a massive reduction of what you’re going to consume. The opportunity cost [of going slower on the ballast leg] is absolutely minimal in the market we are in. So, please, focus guys,” said the Euronav CEO, admonishing brokers.
But it’s not just brokers who put out rate reports. So does the Tankers International (TI) VLCC pool. De Stoop’s company, Euronav, is a founding member of TI, which publicly reports VLCC spot fixture deals each day. It has reported numerous negative TCE deals. On Friday, TI reported a preliminary agreement to charter the VLCC Ivonne from the Middle East to India at a TCE of -$4,825 per day.
Tankers won’t go into layup
According to Barstad, “The challenge is that a large majority of the owners that don’t have scrubbers [allowing use of cheaper 3.5% sulfur heavy fuel oil] or modern eco ships have been making negative numbers for an extended period of time.”
Tanker owners are agreeing to loss-making voyages because there’s no viable alternative for ships too young to be scrapped. Laying up non-scrap-worthy tankers is too expensive and impractical. Plus, owners see a strong market just over the horizon, after vaccines are prevalent and air travel returns. Despite the pain, they want to remain in the game.
Kosmatos explained, “This depression in rates is almost exclusively pandemic-related. We do see an end in sight. It’s a matter of when, not if. And when you reach the end of this crisis, you need to be on the radar screen. You need to keep moving oil, even at a loss for a small period of time, because the vessel needs to be there to take advantage [of a recovery] and you have to make sure the propellers are still running and the vessel is operating and positioned to be in place for what could potentially be a lucrative market rebound.”
Advice to owners: Just say no
Referring to rates, Barstad added, “We’ve kind of gotten used to just sailing through the storm rather than stopping and waiting for it to pass. But I have to say that we as owners have to consider whether it’s correct to drop your pants — your price — at every turn to wiggle out business that’s loss-making.”
While Barstad agreed that it didn’t make sense to lay up a tanker, he stressed, “You can say no. I think our clients are not used to getting the word ‘no.’ This doesn’t make any sense at all. We as owners have a collective duty …”
De Stoop completed Barstad’s sentence. “We have a duty to say no when we are basically subsidizing our customers.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON TANKERS: Crude tankers stuck in ‘rate hell’: see story here. Tanker recovery still distant prospect after Saudi surprise: see story here. Tanker shipping at risk of rare winter hibernation: see story here.