What if country A needs diesel, and country B, located right next door, has that diesel, which it refines from crude oil produced within its own borders — but country A is forbidden from buying it? What if country B then ships its crude all the way to the other side of the globe to country C, which refines it into diesel and ships that diesel all the way back around the globe to country A?
That sounds crazy from a transport economics perspective. It also sounds phenomenal for tanker owners, because longer voyage distances soak up more vessel supply and boost rates.
It looks increasingly likely to happen. EU countries will not buy Russian seaborne crude after Dec. 5. Russia has already hiked crude exports to China and India. EU countries will not buy Russian refined products, including diesel, after Feb. 5. China is already gearing up its refineries to export more refined products. Some will head to the EU. India could ramp up products exports to the EU, as well.
This highly inefficient trade scenario is just one of several drivers fueling intense investor interest in product-tanker stocks such as Scorpio Tankers (NYSE: STNG) and Ardmore Shipping (NYSE: ASC). Both hit new 52-week highs on Tuesday, with Scorpio up 302% year to date and Ardmore surging 308%.
‘Unprecedented confluence’ of tanker drivers
Scorpio Tankers reported the best results in its history on Tuesday. It posted net income of $266.2 million for the third quarter, compared to a net loss of $73.3 million the year before. “These are record earnings and normally one might think that it doesn’t really get better from here,” said Scorpio Tankers President Robert Bugbee during the company’s earnings call. “However, the fourth quarter has already started much better than the third. So yes, it looks like it is going to get better from here.”
Product-tanker spot rates have been driven to multiyear highs by the post-COVID demand recovery, a scramble to buy diesel, longer voyage distances between refineries and consumer destinations, a steep decline in global distillate inventories, higher refinery utilization and limited supply growth.
“The confluence of factors and degree to which those factors are impacting our markets is unprecedented,” said James Doyle, Scorpio Tankers’ head of corporate development, on the call.
Russia sanctions should increase product tanker demand even further. Doyle cited estimates that ton-miles (demand measured as volume multiplied by distance) could increase 6% as a result of Russian products cargoes rerouting from the EU — and that doesn’t even account for EU replacement cargoes traveling longer distances.
Gearing up for sanctions upside
Lars Dencker Nielsen, Scorpio’s commercial director, sees preparations already underway to replace Russia’s soon-to-be-sanctioned petroleum products.
“Asian refineries are ramping up their export capacity. There is certainly prep work further afield and that is obviously going to impact ton-miles positively,” he said. “We’re starting to see the early machinations for cargo to move from Asia to Europe. We anticipate this to ramp up considerably in November.”
Doyle highlighted new refining capacity coming onstream in the coming months in the Middle East. “Outside of that, the only other region that has spare capacity right now is China,” said Doyle.
Nielsen explained: “It takes 10 days on a round [trip] voyage from Primorsk to Rotterdam. If you want to move the same product from the Middle East, you’re looking at 40 days. It will certainly have a big impact as we move toward Feb. 5.”
According to Bugbee, the market is already very tight, so any additional ton-mile demand would have an outsize effect. “Whether it’s 8% [increased ton-miles] or 6% or 4%, the market is in the low 90s [percent] in terms of utilization at the moment, so any percentage is an exponential kicker on rate structures.”
Russian crude to China, Chinese products to EU?
BTIG analyst Gregory Lewis said he was told by several investors that they expect “Russian crude to continue to be discriminated against and sent to China, and once the crude is refined in China, it kind of ‘washes’ it [of sanctions risk].”
Scorpio Chief Operating Officer Cameron Mackey agreed. “At the moment, that does sort of relieve further purchases from sanctions. But we just don’t know how things will evolve,” he cautioned.
The scenario of Russia selling crude to China, and China selling refined products derived from Russian crude to the West, was discussed by U.S. government officials at the Capital Link New York Maritime Forum in September.
Their message was: As long as Russian crude is priced below the cap to be set by the G7, such a tanker trade would be welcomed, because it keeps petroleum flowing into the global market, a benefit to U.S. consumers. They voiced no concerns that Chinese refiners and tanker owners would make more money in the process.
“There are two goals: keeping volumes in the market and reducing revenues to the Kremlin,” Erik Van Nostrand, senior adviser for Russia/Ukraine at the Treasury Department’s Office of Economic Policy, said at the Capital Link event. “If this oil is trading [from Russia to China or another buyer] at meaningfully below-market prices, we see that as a desired outcome. We don’t have a strong preference where the discounted oil is going, as long as it is flowing and keeping downward pressure on global markets.”
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