Battle of the Barrels

The current global situation has been dramatically changed after the outbreak of the COVID-19 virus. Described as a virus with significant high infection ratio, the pandemic has wounded both humans and the economy. To limit further infections, nations worldwide have taken several measures to cope with the virus. This has resulted in several businesses, big or small, facing challenging market conditions. In the panic that unfolds today, the situation in the stock markets can be described as no other than a massacre where safe havens are almost impossible to identify as investors have started their sell off. Through these difficult times, we can still see the contour of one of the best tanker markets in several decades. The earnings have gone into a stratospheric territory, with no signs of any potential slowdown. The tanker market flourishes with positive news, and strong fundamentals to support it. At this time, it looks like the market is moving into a new golden era, where shortage of vessels and historical high oil trading volumes will generate a rare amount of cash flow to the shipowners.

As of today the world seems to have gone into some sort of a ‘’standby-mode’’, and the situation in the tanker market is very different. After the OPEC+ negotiations broke down with the aim of further cutting oil production, the situation escalated. Saudi-Arabia is exhausted by the entry of the American shale oil where they have been gaining market shares for a long time. This has led to a globally price war, where Saudi Arabia sells their oil at a significant price reduction towards their preferred customers. The consequence of this price war is that Saudi Arabia over-flooding the oil market, which comes as a shock on the markets and has led to the highest drop in oil prices since 1991. What we identify now is a global, heavyweight battle between USA, Russia and Saudi-Arabia, where time will show which one of these can survive by selling the cheapest oil over time and conquer the most market shares.

With that being said, the strategy from Saudi-Arabia has to be considered risky, especially bearing in mind that the coronavirus is ravaging worldwide and this has resulted in a slowdown of global oil demand. From the 1st of April, Saudi-Arabia will produce an extra 2.6m bpd, whereas their energy minister Abdulaziz bin Salman Al Saud has signalled an increase in oil production capacity to 13m bpd by the end of the year. This has resulted in an armada of oil exports from the Arabian Gulf where all available tonnage has been devoured, putting the earnings to world record levels in terms of crude oil freight. As of now, a VLCC has been chartered from the Arabian Gulf to the West Coast of India with earnings of $410.000 per day (yet to be concluded), a tanker market rally we have never seen before.

It is easy to compare this significant increase in earnings to the rise we experienced in October, where rates rose as quickly as they fell. American sanctions towards the whole COSCO tanker fleet, geopolitical tensions in the Middle East as well as tonnage in dry dock retrofitting scrubbers put the rates towards $300.000. Today, the similarities are more equal to the situation 4-5 years ago with a surplus of oil on the water, and weak spot crude prices generated demand for inventory building and floating storage opportunities. At this time the asset prices rose significantly from 2013-2016. The fundamentals of this market is significantly better than the fundamentals we saw back in 2013 to 2016.

Consider this:

1 barrel of oil costs $30.

A fully laden VLCC, equals 2m barrels which is $60.000.000.Today, a VLCC costs the oil majors approximately $60.000 per day as floating storage. Older tonnage needs approx. $20.000 to cover costs. The owners will have a return of $40.000 a day per VLCC. Such trade can last up to 6 months or longer. If the oil companies use floating storage to the price of today, a change of $1 per barrel demonstrates an impact in their calculus of $2.000.000. Imagine if the oil price bounces back to $50 per barrel. A lot of oil majors and traders detect this historical opportunity, hence the demand for oil tankers will be significant. When Saudi-Arabia and Russia have squeezed the shale oil producers, they will probably slowly cut down on production and ensure higher prices for the oil they in the meantime have stored offshore.

It is challenging to invest in today’s markets, but with freight rates on crude oil exceeding $400.000 a day, a shipowner could potentially earn the value of the vessel on one trade (with older tonnage). Looking forward, 17% of the VLCC fleet and 20% of the Suezmax fleet will disappear in dry dock during the year. If you combine this with 5% (potentially a lot more) of the tanker fleet being used for floating storage, we are looking at a basically non-existent tonnage list. Low oil price in today’s market means increased demand for tankers, with the price war having a potential of continuing onto the next year. All investments represent a certain elements of risk factors, but taking the tanker fundamentals into account, the investors who allocate funds into this market will potentially position themselves inline for super profits in the next years to come.

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