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.

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Commodity shipping stocks are trouncing Dow transport average

shipping stocks stock sharesTanker, bulker and LNG shipping stocks rise as domestic freight and container stocks face pressure.

shipping stocks stock shares

The Dow Jones Transportation Average has slumped 11% since late March on fears of waning domestic demand. Container shipping stocks have been dragged down along with domestic transports.

Not so with commodity shipping stocks, which have very different drivers. Tanker, gas carrier and dry bulk shipping equities are heading up. 

Shipping stock charts were awash in double-digit green numbers on Thursday, a day when the main indexes were in the red. 

Tsakos Energy Navigation (NYSE: TNP) and Teekay Tankers (NYSE: TNK) hit fresh 52-week highs on Thursday, as did dry bulk carrier owners Genco Shipping & Trading (NYSE: GNK) and Golden Ocean (NASDAQ: GOGL), and liquefied natural gas (LNG) carrier owner Flex LNG (NYSE: FLNG). 

Numerous other commodity shipping stocks — but not container stocks —  are on the cusp of new one-year highs.

Tanker stocks

The Dow Jones Transportation Average (DJTA) is down 9.9% year to date (YTD). 

In contrast, shares of product tanker owner Scorpio Tankers (NYSE: STNG) are up 77% YTD. Shares of Tsakos Energy Navigation are up 68%. Nordic American Tankers (NYSE: NAT) is up 60%, Teekay Tankers 57%, Euronav (NYSE: EURN) 42% and International Seaways (NYSE: INSW) 41%.

shipping stocks shares
All stock charts by Koyfin

Tanker spot rates have finally picked up in recent weeks. Clarksons Platou Securities put rates for modern-built Suezmax (1-million-barrel capacity) crude tankers at $45,300 per day, up 163% month on month. Modern-built product tankers in the MR class (25,000-54,999 deadweight tons) were the top performers, earning $52,400 per day.

LNG stocks

The Russia-Ukraine war has been a major positive for stocks of companies that transport, produce and regasify LNG. The sentiment is that Russian pipeline volumes will be replaced by seaborne volumes over time, a net positive for seaborne demand despite lower average voyage distance as more U.S. LNG goes to Europe instead of Asia.

Shares of Flex LNG are up 36% YTD, shares of GasLog Partners (NYSE: GLOP) 30%.

shipping stocks shares

Dry bulk stocks

Dry bulk stocks fell in early April along with domestic transport and container shipping stocks. They have since rebounded, despite very weak rates for larger Capesize (180,000 DWT) bulkers and moderating rates for smaller bulker categories. Genco is up 54% YTD. Eagle Bulk (NASDAQ: EGLE) is up 50%, Golden Ocean 47% and Star Bulk (NYSE: SBLK) 34%.

shipping stocks shares

Container stocks

Unlike other ocean shipping segments, container stocks have fallen by double digits since the end of March.

They’ve been weighed by the same consumer demand fears that are hitting the transport index, and have given back much of their YTD gains

However, to put the recent drop in context, container shipping shares have been the best-performing shipping equities since the onset of COVID. Just one example: On Thursday, stock of container-ship leasing company Danaos (NYSE: DAC) closed down 17% from its high on March 28. Yet it was still trading 16 times higher than it was in January 2020, pre-COVID.

Container-ship lessor stocks have fallen recently despite these companies boasting several years of contracted revenue booked at record rates, shielding them from exposure to a drop in consumer demand. They also have customers (the container lines) with record cash buffers, removing counterparty risk.

Ocean carrier shares have fallen further than ship-lessor shares. Zim (NYSE: ZIM) and Matson (NYSE: MATX) are down 6% and 3% YTD, respectively. Not quite as bad as the Dow Jones transport average, but close.

Carriers are exposed to near-term U.S. consumer demand via spot rates. However, roughly half their revenue is covered by long-term contracts that have already been largely negotiated for 2022 at record-high levels. Furthermore, spot rates are still extremely strong. Drewry puts current Shanghai-Los Angeles spot rates (excluding premiums) at double last year’s rates and five times 2020 rates.

Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

Container shipping lines reported the best quarter in their history in Q4 2021. Early indicators show that the first quarter of this year will either be a close second or another peak, depending on the carrier.

China’s Cosco recently disclosed that it expected Q1 2022 net profits of 27.6 billion yuan ($4.3 billion).

That’s up 79% from the first quarter of last year and not far below the 30.5 billion yuan record hit in Q4 2021.

Taiwan’s Evergreen disclosed monthly operating revenues through the end of March. Its Q1 2022 operating revenue reached an all-time high 170.8 billion New Taiwan dollars, up 90% year on year and up 10% from the previous high in the fourth quarter.

Chart: American Shipper based on data from Evergreen

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Tanker shares jump as war rages; other shipping shares mixed

containers shipping tankers dry bulk stocksTanker stocks favored by retail traders post big gains, while most container and dry bulk stocks hold steady.

containers shipping tankers dry bulk stocks

One of the axioms of shipping is that war can boost freight rates and share prices, particularly for tankers.

Since Russia invaded Ukraine last week, tanker shares have indeed outperformed, but upside is not evenly spread and gains have eased.  

Container and dry bulk stocks have been largely treading water, with multiple names underperforming the S&P 500, particularly on the dry bulk side.

Retail traders fueling tanker stocks

“There are always winners and losers and shipping markets have proven to be direct beneficiaries in a major way of events that are typically not good for the broader market,” said Evercore ISI shipping analyst Jon Chappell.

“It’s not necessarily a long-term investible thesis that if the S&P goes down 20% you want to be max long speculative tanker stocks, but they are a hedge in a lot of these situations,” he told American Shipper. “It has been proven time and time again that when there’s a geopolitical event involving this type of aggression, tanker and defense companies tend to be big winners.”

Since market close on Feb. 22, share of two owners — Nordic American Tankers (NYSE: NAT) and Teekay Tankers (NYSE: TNK) — are up 46% and 24%, respectively.

All charts by American Shipper

Recent trading moves “feel retail-driven if you look at the relative performance,” said Chappell. NAT, the perennial darling among retail traders, “was the biggest winner,” he pointed out. “The second biggest winner was TNK, and that’s a sub-$500 million [market cap]. That’s a retail-type stock.”

In contrast, the larger crude tanker names more favored by institutional buyers “have been some of the biggest laggards,” said Chappell. 

“I think the key is that these tend to be anomalous events and institutions tend to stay away from anomalous events, but if it proves to be a bridge to a more sustainable cycle, that’s where you’ll get more institutional interest.”

There is at least some additional institutional interest in tankers since the invasion, he said. “But the bar was really low, so any [interest] is more, and yeah, there has been some. But it’s still nothing like it was in the Cosco days [when sanctions on Cosco pushed up tanker rates in September 2019], when it was super-hot. Now, we’re coming from a place where some people were kicking the tires a bit, but nobody was there in a major way.”

From the Feb. 22 close to Wednesday’s close, shares of DHT (NYSE: DHT) and Scorpio Tankers (NYSE: STNG) rose 9%, and shares of Frontline (NYSE: FRO) and International Seaways (NYSE: INSW) gained 8%. Shares of Euronav (NYSE: EURN) — the largest U.S.-listed owner by market cap and one that’s marketed to institutional investors — were up only 1.5%, underperforming the S&P 500 over the same period.  

Dry bulk and container stocks

Dry bulk and container stocks rose on Wednesday with the overall stock market and numerous equities posted mid-single-digit gains. These stocks are “plays on the broader economy,” and with the Dow up over 600 points, it’s “not surprising to see them ripping as well,” said Chappell.

However, looking over the past six trading sessions combined, most dry bulk stocks have made little gains or losses. The big exception is Diana Shipping (NYSE: DSX), up 17% since Feb. 22, but for reasons unrelated to geopolitical unrest: It doubled its dividend on Feb. 25. “The surprising dividend increase was a big catalyst,” said Jefferies analyst Randy Giveans.

Among the other dry bulk names, Genco (NYSE: GNK) closed up 5% on Wednesday versus its Feb. 22 close and Star Bulk (NASDAQ: SBLK) was up 2%, while Safe Bulkers (NYSE: SB) was flat, Seanergy (NASDAQ: SHIP) was down 1%, Eagle Bulk (NASDAQ: EGLE) was down 2% and Golden Ocean (NASDAQ: GOGL) was down 6%.

Container stocks have performed better than dry bulk stocks since the Russian invasion began, but not by much.

Among the container-ship lessors, Euroseas (NASDAQ: ESEA) was up 6.5% since Feb. 22; Global Ship Lease (NYSE: GSL) — which reported better than expected quarterly results on Wednesday — was up 5%; Costamare (NYSE: CMRE) — which also owns a large dry bulk fleet — was up 1%; and Danaos (NYSE: DAC) was down 3%.

Among the ocean carriers, Matson (NYSE: MATX) was up 6% and Zim (NYSE: ZIM) 2%. But Copenhagen-listed shares of Maersk, a company with heavy exposure to European container trades, have dropped 5% over the past six trading sessions .

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