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Ocean Rate Report: Philly fire sparks product tanker earnings

When bad things happen in the world – explosions, conflicts, disasters, chaos – ocean ship owners often benefit. In some cases, an unexpected surge in demand leads to a spike in rates. In others, the event causes ships to take longer routes, reducing effective vessel supply, also a plus for rates.

When the Philadelphia Energy Solutions (PES) refinery exploded on June 23, it was a given that product-tanker rates would rise – and they did. And in yet another case of bad things being good for rates, saber-rattling between the U.S. and Iran continues to support crude-tanker earnings.

Trans-Atlantic product tanker business on the rise

Clarksons Platou Securities analyst Frode Mørkedal said in a note to clients on June 26 that the PES facility, the oldest and largest refinery in the U.S. East Coast region, is expected to be permanently shuttered after the explosion and fire.

Given its capacity of 335,000 barrels per day, he said that “the shutdown of the refinery would likely push domestic gasoline prices higher – the New York gasoline price was up around 5 percent since yesterday – effectively making it more attractive to import gasoline from Europe, positively impacting ton-miles for MR [medium-range] vessels.”

MR product tankers are comprised of MR1s, which have 25,000-39,999 deadweight tons (DWT) of capacity, and MR2s, with 40,000-54,999 DWT of capacity.

Clarksons estimates that MR rates as of June 26 are $17,000 per day, up 23 percent week-on-week. “With more volumes expected to be moved from Europe, the supply side should tighten, supporting higher rates,” wrote Mørkedal.

Amit Mehrotra, the transportation analyst at Deutsche Bank, shares that view. “With tight tonnage lists and significant momentum, we expect MR markets to continue moving higher in the coming weeks,” he affirmed.

Public shipping companies with spot MR product tanker exposure: Scorpio Tankers (NYSE: STNG), Ardmore Tankers (NYSE: ASC), International Seaways (NYSE: INSW), Torm Tankers (NASDAQ: TRMD).

Middle East crude oil tanker rates go higher still

In the wake of the tanker attacks in the Gulf of Oman on June 13 and the downing of a U.S. drone on June 20, crude oil tanker rates continue to ascend. The affected segment is very large crude carriers (VLCCs), which are designed to carry two million barrels of crude oil each and are the dominant crude-tanker category for Middle East exports.

According to Mehrotra, “The VLCC spot market continues to tighten following tanker attacks and rising geopolitical tensions in the Middle East with charterers needing to pay a premium to bring vessels into the Gulf. VLCC spot rates surged 82 percent week-on-week [last week] to $21,800, the highest level since March.” He added that “the tightening in the Middle East has spilled over into the Atlantic, where VLCC rates have caught a bid.”

According to data from Clarksons, the increase in VLCC rates has slowed after the initial surge. It estimates that daily rates are $23,900 as of June 26, up 1.3 percent week-on-week and up 40 percent over the past month.

Mørkedal at Clarksons highlighted the effect on insurance risk premiums from recent unrest and how rates are outpacing premium rises. “In the tanker market, insurance premiums for owners going into the Middle East have increased ten-fold, to currently between 0.25 percent and 0.35 percent of the value of the ship,” he explained.

“For the average 10-year-old VLCC, which is valued at just below $50 million, this indicates approximately $150,000 in extra cost for the shipowner. Divided by the approximately 50 days [it takes for the] Middle East Gulf-China round-trip, the war-risk premium is therefor $3,000 per day.

“Tanker rates have improved by much more. In other words, ship owners have benefited as the productivity of the fleet has decreased, with several public owners being reluctant to send ships into the region,” he said.

Public companies with spot VLCC exposure: Euronav (NYSE: EURN), DHT (NYSE: DHT), Frontline (NYSE: FRO), International Seaways (NYSE: INSW)

Box ships charter rates up, freight rates flat

In the container shipping sector, an unusual dynamic is persisting in which vessel charter rates are rising as container freight rates are falling or flat.

Some analysts have credited this dichotomy to larger container ships being taken out of service for scrubber installations to prepare for the IMO 2020 sulfur cap, which requires liners to charter-in replacement tonnage, increasing demand and thus rates. But now, charter rates are rising for medium-sized and even some smaller vessels – which are less likely to be candidates for scrubber installations.

According to Mørkedal, “Conditions for the larger container-ship charter market remain positive, with the potential for further improvements potentially materializing in the coming weeks, our brokers report. There are a number of [charter-in] requirements still outstanding and limited tonnage available.”

In the mid-sized categories, he noted, “A consistent level of demand has helped to almost entirely deplete the pool of idle tonnage in the classic Panamax sector, and rates here are starting to increase, moving into year highs of around $9,200 per day.” In the small-ship categories, he said, “Charter rates have ticked up a little at the larger end of the feeder market, but this has yet to filter down to the smaller sizes.”

The generally positive momentum for charter rates comes against a backdrop of fairly tepid container freight rates.

The Freightos Baltic Daily Index (China-North America), covering the trans-Pacific trade, is down 10 percent from May 1 and has been relatively flat throughout this month after its plunge and quick recovery in late May.

Both the Freightos global index (FBXD.GLBL) and the index for the world’s largest container trade lane – China-North Europe (FBXD.CNER) – are also relatively static this month and down 2 percent from May 1. 

Public shipping companies with exposure to container-ship charter rates: Seaspan Corp. (NYSE: SSW), Danaos Corp. (NYSE: DAC), Global Ship Lease (NYSE: GSL), Capital Product Partners (NASDAQ: CPLP), Navios Containers (NASDAQ: NMCI), Navios Partners (NYSE: NMM), Performance Shipping (NASDAQ: DCIX), Euroseas (NASDAQ: ESEA)

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Greg Miller, Senior Editor

Greg Miller covers maritime and finance for FreightWaves. He took a circuitous route to get here: After graduating Cornell University, he fled the harsh winters of upstate New York for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he escaped the tropics for the safety of New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at Fairplay magazine in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shi Tzus.

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