The tanker market is on fire – literally.
Yet another vessel has been attacked in the Middle East region – this time, an Iranian tanker in the Red Sea – marking yet another case of ships and their crew being used as pawns in a larger geopolitical conflict.
The near-term effect for ocean shipping is to push already stratospheric rates even higher. Day rates for very large crude carriers (VLCCs, which carry 2 million barrels of crude each) are rising rapidly toward the $200,000 per day threshold.
There are individual fixtures being done at much higher levels. The Tankers International pool reported on Oct. 11 that the 2012-built VLCC Ingrid has just been booked at the equivalent of $301,219 per day (on the basis of 45.4 days).
The percentage of the VLCC transport cost to cargo value is now quadruple what it was one year ago – but there still appears to be plenty more room for rates to run. U.S.-listed tanker stocks are now surging upward in response.
Attack in the Red Sea
According to the Islamic Republic News Agency (IRNA) of Iran, the tanker Sabiti was struck by missiles on Oct. 11 in the Red Sea, 60 miles west of the port of Jeddah, Saudi Arabia. IRNA quoted a spokesperson of the National Iranian Oil Company as stating that the vessel was stable and the crew members were safe.
IRNA quoted an Iranian Foreign Ministry spokesperson as stating that the ship was hit twice, 30 minutes apart, and that other “destructive moves against Iranian tankers” had been “carried out” over recent months. The spokesperson also referred to an oil spill.
The Sabiti is a Suezmax-size vessel (a Suezmax can carry 1 million barrels of crude oil) that was reportedly fully laden when it was hit. The attack on the Iranian tanker comes less than a month after the Sept. 14 strikes on Saudi Arabia’s oil fields, which Saudi Arabia has blamed on Iran.
How the attack affects shipping rates
For the tanker market, the Sabiti attack adds further fuel to a market that was already spiking. According to Clarksons Platou Securities, “This is yet another event shaking the market, which is likely to make risk premiums in the region rise again.”
One issue to watch going forward is the cost of transport in relation to the value of the crude oil cargo. If the percentage gets too high, it could affect oil shipping economics.
In the case of the fixture of the Ingrid, at over $300,000 per day, the cost of the transport comes out to around 12% of the cargo value (estimated using the OPEC basket price). That is unusually high. VLCC transport costs are generally in the single digits; at this time last year moving a comparable load would have cost 3% of the cargo value.
FreightWaves asked Randy Giveans, analyst at investment bank Jefferies, how VLCC freight costs could affect future decisions on shipments of crude oil. In response, he pointed out that this question must be answered in the context of potential upside risks to the price of crude oil.
“When crude was $80-plus per barrel and VLCC spot rates were $20,000 per day, the value of the cargo was $160 million and the cost to ship it was maybe $4 million [equating to a transport cost of 2.5% of the total cargo value]. The current cargo value is $120 million and the current cost to ship it is $14 million-plus from the U.S. Gulf to Asia [equating to a transport cost of 12% of cargo value].”
But a commodity shipper is not just looking at the transport cost. Giveans told FreightWaves, “If you are an importing nation building inventories, you would rather buy WTI [U.S. West Texas Intermediate crude] at $55 per barrel and pay $15 per barrel to ship it, or $70 per barrel total, than hope shipping costs fall [to] $10 per barrel but risk WTI price rising to $65 per barrel, [which would bring the total cost up] to $75 per barrel.”
In other words, Giveans does not believe the rise in VLCC rates due to the latest Middle East unrest will staunch the flow of crude loading in the U.S. Gulf for transport to Asia.
How attack affects shipping stocks
U.S.-listed crude tanker owners have performed strongly over the past month given a “perfect storm” of positives for rates, ranging from stock-building in the wake of the attacks on Saudi oil facilities to U.S. sanctions against a COSCO subsidiary to ExxonMobil’s decision to cease chartering tankers that had previously called in Venezuela.
The attack on the Sabiti has sparked even more investor interest in stocks of owners of VLCCs and Suezmaxes. During the first hour of trading on Oct. 11, volume was extremely heavy and shares of Teekay Tankers (NYSE: TNK) and Nordic American Tankers (NYSE: NAT) rose by 8%, Euronav (NYSE: EURN) by 7%, Diamond S Shipping (NYSE: DSSI) by 6%, International Seaways (NYSE: INSW) and Frontline (NYSE: FRO) by 5% and DHT (NYSE: DHT) by 4%. More FreightWaves/American Shipper articles by Greg Miller