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Tankers See Strongest Market in 25 Years

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War effect on crude trade: Long-lasting and just beginning

It appears increasingly likely that war-driven changes to global crude flows will persist — and grow — through 2023.

photo of a crude oil tanker

Is the shift in global crude flows due to the Ukraine-Russia war a fleeting event or a more lasting, structural change?

At first, many market watchers and investors viewed it as short-lived. It now seems like something to count on for at least the medium term. More Russian crude will likely head to India and China for a longer period of time, and more Atlantic Basin and Middle East crude will head to Europe to replace Russian barrels.

“Oil supply chain disruptions related to Russia’s invasion of Ukraine are proving to be durable and marked by significantly longer average voyages,” said Steward Andrade, CFO of Teekay Tankers (NYSE: TNK), during Thursday’s quarterly conference call. “These trade pattern changes are likely to be long-lasting.”

Executives of Euronav (NYSE: EURN) highlighted the same point on their quarterly call on Thursday. According to Brian Gallagher, Euronav’s head of investor relations, “This isn’t some event that happens over a few weeks. There’s a longevity to the structural change.”

Only the beginning

The EU ban on crude oil and petroleum product imports doesn’t take effect until Dec. 5 for seaborne shipments and Feb. 5, 2023, for pipeline imports.

As of now, Europe is still importing large quantities of Russian crude. Pre-invasion, volumes were around 4 million barrels per day (b/d). Various estimates put the reduction to date at around 700,000 to 1 million b/d. Tanker effects are already significant despite the transition being just one-quarter complete.

“We are only seeing the beginning of a story that will have a long tail,” said Euronav CEO Hugo De Stoop.

Upside for smaller and midsize tankers

War-driven trade changes have mainly impacted smaller tankers known as Aframaxes (with capacity of 750,000 barrels) and midsize Suezmaxes (1 million barrels). Larger tankers known as very large crude carriers (VLCCs, with capacity of 2 million barrels) are too big to call at Russian terminals.

Andrade explained, “Short-haul exports of Russian crude oil to Europe have fallen by around 700,000 b/d compared to pre-invasion levels, with Russian crude oil increasingly being diverted to destinations east of Suez, particularly to India and China.

“Europe is having to replace short-haul Russian barrels with imports from other regions, most notably from the U.S. Gulf, Latin America, West Africa and the Middle East. These changes are primarily benefiting Aframax and Suezmax tankers due to the load and discharge regions involved.”

Compares average seaborne crude oil flows in three months prior to invasion versus three months after (Chart: Teekay Tankers earnings presentation based on data from Kpler)

“When oil imported into Europe previously came five days from the Baltic and now comes approximately 20 days from the Middle East on a Suezmax or approximately 20 days from the U.S. Gulf on an Aframax, that is obviously helpful for ton-mile demand.”

Tanker demand is measured in ton-miles: volume multiplied by distance. The longer the average distance, the more tankers you need to carry the same volume.

“When China imports oil from the Baltic on Aframaxes — which we’ve seen recently — it’s another example of increased ton-mile demand due to changing trade patterns,” added Andrade.

More ship-to-ship transfers to VLCCs?

Euronav expects the war effect to benefit VLCCs as well, for two reasons: because of ship-to-ship transfers in the Russia-to-Asia trade and because of the strong interconnection between Suezmax and VLCC markets.

“The most efficient way to transport crude oil over long distances is obviously on a VLCC. So ideally, they would do transshipment,” said De Stoop, referring to Aframaxes or Suezmaxes loading in Russia and transferring cargo to VLCCs. 

“We’ve already seen a few of those, largely off Africa. We’ve also seen cargo being discharged in Libya and Egypt for relatively short periods then lifted again on bigger ships. The part of the industry that can do that [carry Russian oil] is trying to find the most efficient way to carry that oil to the Far East.”

Suezmax-VLCC connection

Meanwhile, if Suezmax rates rise too high versus VLCC rates, oil shippers traditionally combine two Suezmax cargoes into one lot and use a VLCC instead.

“There are a lot of markets where two Suezmax cargoes can go into one VLCC, so you have this push-pull effect,” said De Stoop. “When the Suezmax market is doing very well, and is seeing many more cargoes, that would naturally have a knock-on effect on the VLCC market. Those two markets are really, really interconnected.

“When we speak to the chartering desks of our clients, it’s usually the same people [booking Suezmaxes and VLCCs] and they monitor the price of one versus the other. In the last two or three weeks, we have seen a lot of cargoes that were shown to our Suezmax desk and then they disappeared and popped up in the [VLCC] pool. Two cargoes were being combined in order to be carried by a VLCC.

“Normally, it’s the VLCC segment that is doing the heavy lifting for all the other segments. This time around — because the disruption is coming from Russia and Russia is not a VLCC market — the pushing is coming from the smaller sizes.

“The Aframaxes are pushing the Suezmaxes and the Suezmaxes are now pushing the VLCCs. Simply because when you compare rates of Suezmaxes to VLCCs, it’s a lot cheaper to use VLCCs. [According to Clarksons, Suezmax rates are currently 30% higher.] 

“And that’s what we have seen in recent weeks. That’s the main reason why we believe the VLCC market improved after the Suezmax had already improved.”

Tanker earnings roundup

The VLCC market may be improving, but it was extremely weak in the second quarter and the early part of the third quarter.

Euronav, which owns VLCCs and Suezmaxes, reported a net loss of $4.9 million for Q2 2022 compared to a net loss of $89.7 million in Q2 2021. Its adjusted loss of 12 cents per share was just shy of the consensus outlook for a loss of 11 cents.

Euronav’s VLCCs earned an average of $17,000 per day in Q2 2022. So far in the third quarter, the company has 47% of available VLCC days booked at a significantly lower rate: only $12,700 per day. De Stoop attributed this to longer-haul voyages booked during a period of weak rates and VLCCs employed on lower-earning repositioning voyages.

Teekay Tankers — which owns a fleet of Suezmaxes, Aframaxes and product tankers — reported net income of $28.5 million for Q2 2022 versus a net loss of $129.1 million in Q2 2021. Adjusted earnings per share of 76 cents topped the consensus forecast for 61 cents.

Teekay’s spot-trading Suezmaxes earned $25,310 per day in Q2 2022. So far in the third quarter, the company has 43% of its available Suezmax days booked at an even higher average rate: $29,600 per day.

Click for more articles by Greg Miller 

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Used Product Tankers Are Hot Property

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In topsy-turvy commodity trades, small ships outperform big ships

photo of large crude tanker; large ships are earning less than small shipsFrom crude tankers to product carriers to dry cargo ships, the largest vessels are earning less than their smaller counterparts.

photo of large crude tanker; large ships are earning less than small ships

You pay more to get more. Renting a four-bedroom townhouse is far more expensive than renting a studio apartment. The nightly rate for a penthouse suite is much higher than for a standard room.

So, in ocean shipping, you might expect booking a load of coal on a mammoth dry cargo vessel would cost a lot more than on a bulker carrying less than a third the volume. Or that a spot voyage deal for a supertanker carrying over twice the volume of crude oil, or a product tanker carrying over twice the gasoline, would be way more expensive than on a smaller ship.

This year, you’d be wrong. Spot employment for smaller bulk commodity ships costs more than for larger ships — in most cases, a lot more.

Rates for large ships vs. small ships

According to Clarksons Platou Securities, spot rates for 10-year-old very large crude carriers (VLCCs, ships with capacity of 320,000 deadweight tons, or DWT) averaged the equivalent of just $1,400 per day year to date (YTD) through Tuesday.

Aframax tanker NS Consul (Photo: Flickr/Kees Torn)

Spot rates for Aframax crude tankers (115,000 DWT) — which hold over 60% fewer barrels than VLCCs — were 15 times higher: $21,300 per day YTD. 

In the product tanker sector, spot rates for larger vessels known as LR2s (115,000 DWT) averaged $26,200 per day YTD for 10-year old vessels. That’s 10% lower than rates for medium-range (MR) product tankers (50,000 DWT) with less than half the cargo capacity of an LR2.

Clarksons’ data shows the same disparity in dry bulk shipping.

Spot rates for larger bulkers known as Capesizes (180,000 DWT) averaged $18,100 per day YTD. Rates for Supramaxes (56,000 DWT), which have less than a third of the capacity of Capesizes, averaged 49% higher: $26,900 per day. 

The dry bulk market is “upside down [compared to] normal trading patterns,” noted Stifel analyst Ben Nolan in his latest quarterly earnings preview.

Megasized bulk commodity ships traditionally earn more than smaller ones because they move so much more volume per voyage. The reason this year is “upside down”: Different size categories carry different bulk commodities and/or ply different routes. The supply-demand balances for the various trades currently favor smaller tankers and bulkers. Such a reversal of fortune happens from time to time but rarely in such a sustained and across-the-board fashion.

Crude tankers

VLCCs serve long-haul, high-volume crude trades such as Middle East to Asia and U.S. to Asia. Smaller tankers don’t have the same scale efficiencies and serve shorter routes, but they’re much more versatile than VLCCs in terms of terminals that can fit them.

VLCC underperformance versus smaller crude tankers has been ongoing since early 2021. “The oil markets seem to be conspiring against the VLCCs,” wrote Erik Broekhuizen, manager of marine research at Poten & Partners, in a recent report.

“VLCCs have traditionally been the bellwether of the tanker markets. The largest crude-oil-carrying ships were usually the leading indicator of where the markets were heading. This changed during the pandemic.”

The VLCC Al Yarmouk (Photo: Jim Allen/FreightWaves)

VLCC rates are getting hammered from both sides: supply and demand. On the supply side, brokerage BRS said there will be 48 VLCC newbuild deliveries this year, 25 of which have already hit the water. Only one VLCC had been scrapped and three sold for scrap through May.

On the demand side, OPEC continues to limit seaborne exports and COVID lockdowns have hit Chinese fuel demand. Broekhuizen noted that “China, the world’s largest VLCC employer, has cut back on purchases from West Africa, Latin America and the U.S.”

Meanwhile, the Ukraine-Russia war has been a boon for sub-VLCC tanker classes as Russian exports continue to flow.

Aframaxes account for 85% of Russian crude exports, according to BRS. India is replacing imports that used to ship from the U.S. aboard VLCCs with imports from Russia aboard Aframaxes as well midsize Suezmaxes (tankers that carry half the volume of VLCCs). Europe is replacing some Russian crude imports with U.S. crude carried aboard Suezmaxes, reducing volumes available to ship from the U.S. to Asia aboard VLCCs, according to Broekhuizen.

Product tankers

The rate advantage for smaller tankers is also driven by higher shipping demand for refined products than for crude, as consumption of gasoline, diesel and jet fuel recovers from pandemic levels. (In terms of tanker scale, the larger product tankers, LR2s, are the same size as the smaller crude tankers, Aframaxes.)

The premium for smaller versus larger product tankers is being partially fueled by strong demand for U.S. refined product exports in western South America, driving high volumes via the Panama Canal aboard MRs.

“MR product tankers earned as much in the last nine weeks as they did in the entirety of 2021,” wrote Nolan on Sunday. “Should the market for product tankers and Aframax [crude tankers] remain at current levels, it could be a year for the record books.”

Dry bulk

Dry bulk is the world’s largest freight market by volume. It features a particularly differentiated cargo mix based on ship size.

Capesizes are highly dependent on iron-ore cargoes — mostly from Australia and Brazil to China — and secondarily, coal and bauxite.

Sub-Capesize bulkers carry a much more diverse range of cargoes (grains, coal, cement, steel, salt, ores, logs, fertilizer, phosphate, aggregates, alumina, copper, salt). They also call on a much more diverse range of destinations. 

Iron ore being unloaded from a Capesize bulker in China (Photo: Shutterstock/Ambient Pix)

Whereas Capesize rates hinge on Chinese demand, smaller bulkers are more linked to global GDP. Smaller bulkers have also benefited from cargo that used to be containerized but switched to bulk to save on freight.  

According to BRS, dry bulk volume to China in the first half of 2022 fell 9.2% year on year amid COVID lockdowns. Capesizes have “unperformed on the back of easing [port] congestion, China’s slowing appetite for iron ore and coal, and weather- and COVID-related supply disruptions in Brazil and Australia, respectively.”

China imports iron ore and coal aboard Capesizes to produce steel. With the country’s housing market under pressure, Chinese steel production fell 8.7% in January-May versus the same period last year.

Maritime Strategies International (MSI) pointed out that freight rates have been so strong for smaller bulkers versus larger ones this year that “even a shipment of logs, typically carried in Handysize [under 35,000 DWT] or Supramax bulkers, was carried from Uruguay to China in a 205,000 DWT bulker in April.”

Outlook for large vs. small tankers

If history is any indication, larger commodity ships will regain their premiums.

Frode Mørkedal, analyst at Clarksons Platou Securities, predicted that VLCCs will rise “like a phoenix” and “prosper.”

Aframax tanker Gold Sun arriving in Houston (Photo: Jim Allen/FreightWaves)

Regarding the 10-year-old VLCCs averaging a paltry $1,400 per day this year, Clarksons forecasts rates will rebound to $41,000 per day next year (78% higher than Aframaxes) and $55,000 per day in 2024 (90% higher than Aframaxes).

According to Broekhuizen, “In the long term, the economies-of-scale benefits of VLCCs will bring this segment back to prominence.

“The dominant oil producers in the Middle East and the fastest growing consumers in Asia all have the infrastructure to use VLCCs. They will use the largest-available vessels to minimize the delivered costs.”

And on the supply side, the orderbook for new VLCCs is historically small. This guarantees exceptionally low fleet growth, a big plus for future rates. Deliveries for 2023-2024 are already set, due to construction lead times. There are just 15 new VLCCs due next year and only three in 2024, according to BRS. No VLCCs are on order for 2025 or later.

In the product tanker market, the gap between LR2s and MRs has already narrowed. Demand for long-haul cargoes of refined petroleum has risen, boosting LR2 rates. The premium of MR earnings to LR2 earnings was much higher in April than it is today. Clarksons predicts that larger product tankers will once again outperform smaller product tankers in 2023-24.

Outlook for large vs. small dry bulk ships

The rate gap has also narrowed between larger and smaller dry bulk carriers. In dry bulk, though, it’s more about rates for smaller ships coming back down toward larger-ship rates, as opposed rates rising for larger vessels.

Geared Handysize bulker Maple Ambition in New Zealand (Photo: Flickr/Bernard Spragg)

Nolan expects that “Brazilian and Australian iron ore [shipments] should increase,” a plus for Capesizes going forward, while “some of the spillover [of container cargo to bulkers] should ease,” a negative for smaller vessels.

BRS also cited the connection with container shipping, where spot rates have fallen from their peaks. “The easing of the container-ship market would reduce pressure on bulker employment for de-containerized cargo,” the brokerage noted.

Clarksons expects larger bulkers to once again earn more than smaller bulkers in 2023-2024. But unlike its outlook for VLCCs, it does not foresee a big rate increase.

According to Clarksons’ Mørkedal, “We expect Capesize spot earnings to average $23,000 a day in 2022, then fall to $22,000 per day in 2024 before rising slightly to $24,000 per day in 2024. In other words, a reasonable freight market — as the majority of companies’ financial breakeven [rates] are between $13,000 and $14,000 per day — but an unimpressive market development overall.”

Click for more articles by Greg Miller 

A cargo of corn being loaded aboard a bulk carrier (Photo: Shutterstock/Alexey Lesik)

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