Tanker stocks eke out more gains as storm clouds gather

crude tanker

The Dow jumped 829 points Friday on shockingly high U.S. jobs numbers. Even in the topsy-turvy world of tanker stocks, where good news can often be bad news, equities ended green across the board.

Tanker stocks posted low- to mid-single-digit gains on below-average trading volumes. Nordic American Tankers (NYSE: NAT) rose by 7.8%, Teekay Tankers (NYSE: TNK) by 6.1%, International Seaways (NYSE: INSW) 5.8%, Scorpio Tankers (NYSE: STNG) 5.5%, DHT (NYSE: DHT) 4.1%, Frontline (NYSE: FRO) 2.6% and Euronav (NYSE: EURN) 0.6%.

The fact that tanker stocks rose at all could be considered a victory, given rising concerns over oil-production cuts and floating-storage destocking. Evercore ISI analyst Jon Chappell told FreightWaves that  Friday’s gains for tanker stocks “despite the looming OPEC meeting and the [oil] price shift toward backwardation” were “almost certainly” the result of “short covering amid ‘risk on’ as the market ripped 900 points.”

OPEC+ deal imminent?

OPEC and cooperating non-OPEC members (OPEC+) meet Saturday to finalize a one-month extension of 9.7 million barrels per day (b/d) in production cuts, through the end of July, after which cuts would drop to 7.7 million b/d.

In May, OPEC+ cut production by 8.6 million b/d from the agreed baseline, 1.1 million b/d short of the target, according to Argus Media, which estimated that Saudi Arabia’s crude exports fell by 3 million b/d in May, to 6.3 million b/d. That equates to 47 lost voyages for very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude).

Bloomberg reported that under the proposed agreement, countries such as Iraq and Nigeria that are overproducing versus quotas will be asked to pledge compliance and agree to some form of compensation mechanism. Both Argus Media and Bloomberg reported that Iraq had been convinced to back the deal.

According to Chappell, the July extension will be negative for tankers and the “sentiment alone is likely to be damaging for tanker equities.”

He believes a lack of agreement on the extension, with July’s cuts left at 7.7 million b/d, is priced into tanker stocks and would be neutral. And in the unlikely event that the agreement broke down altogether and production was uninhibited, he believes “tanker markets would be off to the races.”

Floating storage is unwinding

Tankers stocks have been trading inversely to oil price since March. Oil pricing surged on both the U.S. jobs report surprise and expectations that OPEC+ would agree to the extension. As of late Friday, WTI crude was up 4.7% to $39.15 per barrel and Brent crude was up 5% to $42.00 per barrel.

Oil’s contango is close to disappearing and pricing is on the cusp of switching to backwardation. In contango, the futures price is higher than the spot price, incentivizing oil storage; in backwardation, it’s the reverse, incentivizing destocking. “Backwardation is coming … or is already here,” said Chappell.

When floatingstorage cargoes are unloaded from VLCCs, those vessels will go back into the spot market. Even if time-charter contracts continue beyond the date when cargoes are unloaded, the charterer can “relet” the VLCC into the spot market until the charter contract expires. The more tankers in the spot market, the more pressure on rates.

Frode Mørkedal, managing director of research at Clarksons Platou Securities, said on Friday, “Floating storage continues to unwind, with the latest count from Clarkson Research Services this morning being 81 VLCCs in temporary and dedicated storage business, down from 83 last week and 103 at the peak in early May.

“Compared with the fleet of 820 ships, there is thus still around 10% of the VLCC fleet in floating storage … [but] if the OPEC+ cuts are extended for another month, then July could likely result in an overall drawdown,” cautioned Mørkedal.

According to Chappell, “With no economic incentive for floating storage likely to drive a painful destocking period and OPEC+ set to extend the deepest part of its cuts for at least another month, the second half of this year looks even more challenging for the tanker markets.”

VLCC rates still triple last year’s

Mørkedal estimated that VLCC rates averaged $52,200 per day as of Friday. Fearnley Securities put Middle East Gulf (MEG)-Asia VLCC rates at $46,300 per day and West Africa-Asia rates at $51,500 per day.

To put these rates in context, VLCCs were averaging a mere $15,300 per day at this time last year.

Fearnley Securities said it expected rates to fall from current levels. “The position list is widening and given the outlook for June volumes from MEG, we expect rates to continue to shift further downward in the weeks to come,” it warned.

The bull argument

Less than two months ago, the bull case for tanker rates, bottom lines and equity valuations was that the loss of oil demand due to COVID-19 would outpace the ability to turn off the world’s production spigots, overwhelming land-based storage, filling the world’s VLCCs with storage cargoes, and leaving far fewer VLCCs to vie for spot contracts, which would keep spot rates historically high.

Oil pricing has rebounded much faster than expected. Now, the bull case is that all of the oil stored on tankers will be swiftly destocked, and even though more VLCCs will be bidding for spot voyages in the near term, the rebound in oil demand will be so strong that rates will be at high levels in the medium term, and will remain elevated in the long term because newbuilding deliveries will plunge.

Jefferies analyst Randy Giveans acknowledged in a report published Wednesday that floating-storage destocking would be a short-term negative, but affirmed, “A quick inventory drawdown period would indicate a more robust recovery in oil demand, which would help stimulate greater production and a quicker return to more normal ton-mile demand growth.

“As oil demand continues to rise while floating storage and inventory stocking give way to drawdowns and more ships return to the transportation market, we believe that VLCC tanker owners will benefit from increased regional oil demand rising in Asia.”

According to Giveans, “Unlike previous destocking cycles, the supply-side picture for tankers is much more attractive as the orderbook-to-fleet ratio is only 8%, well below the historical average of 21% and the lowest since 1997.” Jefferies estimates that annual net VLCC fleet growth will fall from 8.6% last year to 4% this year to just 2% in 2021. Click for more FreightWaves/American Shipper articles by Greg Miller