Wars involving oil producers traditionally cause tanker rates to spike. A month into the Russia-Ukraine war, rates for most crude tankers remain abysmally low. Rates for product tanker rates are up but not exceptionally high.
“The immediate knee-jerk reaction was: Disruptions create strength in the market,” said Evercore ISI analyst Jon Chappell. “We saw that in 1991 and we saw that in 2003, so the thinking was: Here we have another geopolitical event that’s going to lead to [oil] storage and the substitution effect [buyers finding news sources].”
“But it’s dangerous following the old model,” Chappell told American Shipper. “Every event is different.”
Crude tankers fail to recover
Crude tanker owners have been hemorrhaging cash since mid-2020 and continue to do so.
Clarksons Platou Securities put Thursday’s spot rate for very large crude carriers (VLCCs; tankers carrying 2 million barrels) built in 2015 or later at just $2,800 per day. That’s less than a tenth of Clarkson’s estimated breakeven rate for a 5-year-old VLCC of $32,000 per day.
VLCC spot rates are down 59% from a month ago, when the war began.
Suezmaxes (capacity: 1 million barrels) built in 2015 or later are at $15,800 per day, almost double their average spot rates a month ago. However, that’s still well below Clarkson’s estimate of a $24,000-per-day breakeven rate for a 5-year-old Suezmax.
According to Chappell, “The only [crude tanker] markets that really ripped were those directly impacted: the Baltic, Black Sea and Med.” These short-haul trades are served by Aframaxes (capacity: 750,000 barrels) or smaller tankers.
Chappell said that long-haul routes plied by larger-sized crude tankers did see a brief “sentiment-driven spike” in the immediate aftermath of the invasion, but they’re now “back to fundamentals.”
“You haven’t seen any more Saudi or UAE cargoes going to Europe yet, and you haven’t seen a big shift in West African crude. You have seen a little bit of an uptick in U.S. Gulf exports but not enough to change the supply-demand balance.”
Chappell gave three reasons why rates for larger tankers remain so low despite historically high geopolitical risk.
First, ship capacity was “clearly excessive, ” given depressed spot rate levels when the war began. Second, “you’re in the spring, when there’s really not that typical rush to lock in inventories.”
Third, “oil prices just went completely parabolic, and at prices like that in a massively backwardated market, there’s no economic incentive to store oil and there’s no economic incentive to try to build inventory going into the summer.” (In a backwardated market, the current price is higher than the futures price.)
Chappell does see potential for much higher crude tanker rates. “But I think that for that to happen, we need to be in this conflict at these current levels or worse by the time we start looking into the winter, when Europe becomes a bit more desperate to make sure they have inventories,” he said.
“If we’re still in this conflict in September, the price becomes a lot more irrelevant and you’ve got to make sure you have supply.”
Product tankers finally break even
Tankers carrying petroleum products are seeing a different effect from the war.
Clarksons put Thursday’s spot rate for LR2 product tankers (capacity: 80,000-119,999 deadweight tons or DWT) built in 2015 or later at $29,800 per day. That’s up 335% since the war began although down 18% week on week.
The estimated breakeven rate for a 5-year-old LR2 is $23,000 per day. With the exception of the past month, LR2s have consistently lost money since mid-2020.
Rates for LR1s (capacity: 55,000-79,999 DWT) built in 2015 or later were at $25,100 per day, up 171% from a month ago but down 16% week on week, with the breakeven for a 5-year-old LR1 at $18,000 per day. The past month marks the first time LR1s have been consistently in the black since mid-2020.
“With products, the diesel arb is playing a huge role,” said Chappell. “It’s so wide right now that transport costs can push up substantially and the trader still makes a huge profit on the diesel.” (The arb or arbitrage is the difference between what a commodity can be bought for in one place and sold for in another.)
“[Diesel] is also more of a year-round market. You have the driving season in Europe coming up and obviously truck demand is still incredibly strong with consumer demand and supply chain issues. I think diesel is something that can be more sustainable. It’s clearly being represented in some of the long-haul trades [from Singapore, the Middle East and India to Europe] with the LR2s and to a lesser extent, the LR1s.”
Tanker demand is measured in ton-miles: volume multiplied by distance. The replacement of Russian products with diesel sourced by Europe from Asia is dramatically increasing the distance traveled.
“As long as the arb stays open and Russia’s not exporting directly to Europe, that’s a big ton-mile driver to the larger product-tanker sector and I think that one has more legs until there’s a resolution,” said Chappell.
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