It was all setting up so nicely for crude-tanker stocks until those Trump tweets on Thursday morning …
Shares of companies that own very large crude carriers (VLCCs; tankers that carry 2 million barrels of crude) had been climbing steadily since early March, pulled upward by spot rates of over $200,000 per day and expectations for a spike in floating-storage contracts.
Then, like a roller coaster that rumbles over the top of the slope and gathers speed on the other side, the stocks came back down.
At 10:30 a.m. Thursday, the U.S. president tweeted that Saudi Arabia and Russia would cut production by 10 million barrels per day (b/d), then: “Could be as high as 15 … GREAT news for everyone!”
Actually, not everyone. Reduced output equates to fewer VLCC cargoes and less future storage. Merely talking about production cuts can immediately incentivize tanker owners to accept lower rates.
Between the tweets and Friday’s closing bell, crude pricing rose 30% and VLCC stocks went in the opposite direction, despite the fact that VLCC spot rates still exceed $220,000 per day: DHT (NYSE: DHT) fell 22%, Frontline (NYSE: FRO) 21%, Euronav (NYSE: EURN) 16% and International Seaways (NYSE: INSW) 13%.
The wild trading on Thursday was way out of proportion to fundamentals, Evercore ISI analyst John Chappell said in an interview with FreightWaves on Friday.
“Everything was exacerbated by the computers [algorithmic trading] and the ETFs [exchange-traded funds]. Should oil really have been up by 47% at one point yesterday and tanker stocks down at one point by 25%? No. There was trading off of a headline and then a piling-on.”
Asked about the kind of investors moving the needle on VLCC stocks, he reported, “It’s broad-based. It’s investors who have been involved before as well as new investors who are coming out of the woodwork. There are energy people looking for a natural hedge for oil prices and oil-related stocks, and there are also generalists. My phone has been ringing off the hook. I also think it’s retail, although I don’t talk to those people myself.”
He agreed that Thursday’s extreme price moves could scare off some tanker investors but he believes more money will enter than exit.
“Some people will come to a realization on just how volatile and binary this trade can be and I think it will certainly keep some of them on the sidelines,” he conceded. “But I think if trades are being made off a tweet that doesn’t seem to be realistic, then there will be a much larger group that will view this as a buying opportunity.”
Expectations for floating storage have fueled much of the recent bullishness on crude-tanker stocks. As Saudi Arabia and others pump more oil, the coronavirus is simultaneously decimating energy demand. Landside storage will fill up quickly around the globe, and the crude will then be stored on tankers by necessity, starting on older tonnage and then on newer ships.
The more VLCCs pulled from trading and employed under storage contracts, the fewer will compete for spot voyage deals, and the higher the freight rates. Profits and dividends would rise, and theoretically — but not necessarily — stock prices should rise as well.
Tanker stocks face two headwinds regardless of current spot rates. First, the pull of gravity in the broader market due to coronavirus is so strong that tanker equities can be brought down regardless of fundamentals. “Nobody is bigger than the market,” Chappell said. “On the days the market is down by 3,000 points, nothing is going to be up.”
Another headwind is the forward-looking nature of tanker equities. After the world’s stockpiles are all topped off and overflowing, there will be much less demand to move crude aboard VLCCs — the commodity will already be where it needs to be. Tanker rates will almost inevitably fall, possibly for an extended period.
The question is whether larger investors are willing to buy stock in a tanker company that has very strong near-term fundamentals but potentially very weak medium-term fundamentals. Are such buyers willing to take the risk of getting caught off-guard and not being able to exit before prices fall?
Asked about this issue, Chappell responded, “Of course the curves have come down and floating-storage economics have decreased [after crude prices rose on Thursday and Friday]. And if you think the world’s going to get better by June and people are going to start driving cars and getting on airplanes again by then, and that oil curve will shift back into backwardation and there’s going to be a drawdown of the massive inventory overhang, then yes, that’s probably too close and you’re not going to get involved [in tanker stocks].
“But I’m of the view that we’re not going to get back to normal until maybe the end of the third or fourth quarter,” he said.
“The onshore storage issue and floating storage issue and the rate environment are not going to be solved by an OPEC cut. There’s no way to cut enough to offset the demand destruction — people are talking about 20-30 million b/d [oversupply] in the second quarter. Our oil analyst believes onshore storage will be full by the end of this month, and tankers will be the only place to put the oil after that.
“There has always been a forward-looking element [to tanker stocks] but it all depends on your time frame,” Chappell told FreightWaves.
“You can’t paint all big investors with one brush. Is a big long-only fund running $100 billion and taking a three- to five-year view going to get involved [in the current tanker-stock market]? No. Is a huge hedge fund that runs $100 billion and has massive churn every single week going to get involved? Yes. So, there is still big money behind this. It’s just that it’s not the pension funds. It’s the hedge funds.” Click for more FreightWaves/American Shipper articles by Greg Miller