It was a huge day for U.S. stocks, with the Dow surging by over 900 points on news of a potential vaccine breakthrough and positive stimulus comments from Federal Reserve Chairman Jerome Powell.
Many shipping stocks, particularly dry bulk stocks, showed strong gains, with Star Bulk (NASDAQ: SBLK) jumping 15%, Eagle Bulk (NASDAQ: EGLE) up 13%, Scorpio Bulkers (NYSE: SALT) 9%, Golden Ocean (NASDAQ: GOGL) 8% and Genco (NYSE: GNK) 7%.
But tanker stocks were conspicuously absent from the party.
At midday, the screen of shipping stocks was a sea of green, with tanker stocks being virtually the only blips of red. At the closing bell, Nordic American Tankers (NYSE: NAT) was down 4% and International Seaways (NYSE: INSW) 2%, with Euronav (NYSE: EURN), DHT (NYSE: DHT) and Frontline (NYSE: FRO) down earlier but closing up 1%.
The culprit for tanker underperformance: a rise in crude pricing on recovery hopes, with U.S. WTI up 9% and Brent crude up 8%.
Coronavirus optimism fuels higher crude pricing, which flattens the contango curve. In contango, the futures price is higher than the spot price; in the tanker sector, this dynamic allows traders to lease a tanker for storage and sell the crude cargo in the future for a profit.
That tanker contango play is rapidly vanishing, if not already gone.
Tanker stocks trade inverse to crude price
Evercore ISI analyst Jon Chappell tracks the three-month charter rate of a very large crude carrier (VLCC; a tanker that carries 2 million barrels of crude oil) that represents breakeven in light of the prevailing crude contango.
That rate had risen to $111,500 per day as of April 20. On Monday, Chappell told FreightWaves that the breakeven rate had sunk to $24,000 per day, “the lowest since February.”
Clarksons Platou Securities puts the current VLCC spot rate at $48,900 per day. The economics no longer exist to charter a tanker to store crude, confirmed Chappell.
“The tanker stocks are 100% trading relative to crude prices and contango,” Chappell told FreightWaves. “Macro matters more than current rates, although this rising crude price and narrowing curve — with an eventual flip to backwardation — should continue to pressure rates.
“It makes sense [that tanker stocks are trading inverse to crude] and I’m not the least bit surprised how this is trading,” said Chappell. “Tankers outperformed on the floating-storage trade when the broader market was selling off. As the broader market comes back on optimism, demand looks better and floating storage is set to unwind.”
According to Jefferies analyst Randy Giveans, “I certainly agree that crude tanker stocks are trading inversely to crude. There has historically been strong [positive] correlation to Brent; however, since March, they have been negatively correlated, primarily due to the Brent curve flipping into steep contango, resulting in a surge for floating-storage contracts.”
Asked by FreightWaves when tanker stocks could stop trading in inverse correlation to crude pricing, Giveans answered, “I think you’ll have to see tanker-rate stabilization and end-user demand pick up enough to both draw down crude inventories while also boosting ton-mile demand for long-haul crude voyages. Once stabilization occurs, the stocks will trade on improved demand and supply fundamentals, not solely on the degree of floating-storage economics.”
Focus turns to rapid destocking
It is widely believed that the destocking of oil already in floating storage will be a painful process for tanker owners and investors, as transport demand is temporarily reduced.
Euronav recently argued that destocking would take longer than expected, during which tanker supply-demand fundamentals should continue to be positively supported by vessels still tied up in storage. In other words, tanker-storage upside was far from dead in the water.
A different argument is that the storage business is indeed dead, or about to be, and it’s better to get the pain of destocking over with quickly, to “rip off the Band-Aid” and revert to strong fundamentals based on limited newbuilding supply and strong oil-transport demand.
International Seaways CEO Lois Zabrocky said during a webinar on Monday, “The extra component of demand coming from storing oil, not just moving it, was the key reason that oil tankers did not get the really poor environment [from the coronavirus] that greeted dry cargo. Presently, we have the highest amount of crude and product at sea, certainly in the time I’ve been in the business.”
During the webinar, International Seaways CFO Jeffrey Pribor referred to the tanker storage trade in the past tense. “It was very significant in this particular crisis. Maybe it’s about to end. It was really important while it was happening,” he said.
According to Zabrocky, “What we’re starting to see is the world opening up. I’ve seen numbers that there were close to 4.8 billion people in lockdown in April, and that may be reduced by a couple billion people in May. Demand is starting to come back and we will have some of this storage come out.”
Both Zabrocky and Pribor pointed to the rebound of Chinese oil demand to pre-outbreak levels — a positive for transport demand but a negative for floating storage.
“Some of the estimates are that this [destocking] could happen very quickly, and then you could have a resumption of normal [oil-transport] demand somewhere by the end of 2020. Whether or not it will be back exactly where we were [before coronavirus], we’re going to have to see.” More FreightWaves/American Shipper articles by Greg Miller