Hitting a numerical threshold like 10 or 100 or a million is emotionally satisfying, even though there’s nothing inherently special about it. It’s only significant because we use the decimal (base 10) numeral system, likely because we have 10 fingers. However arbitrary it may be, though, passing or nearing such a milestone can affect market sentiment, which has real-world effects on pricing.
The crude tanker sector is flirting with one of those key thresholds right now: a rental rate of $100,000 per day. “The tanker market is going bonkers,” said Stifel analyst Ben Nolan.
The surge in rates is directly related to the Sept. 25 decision by the Trump administration to place sanctions on COSCO (Dalian), a subsidiary of shipping giant China COSCO Shipping Corp. Due to confusion about which vessels are actually on the sanctions list, Western charterers are avoiding all VLCCs (very large crude carriers; tankers that carry 2 million barrels of crude each) linked to COSCO – which equates to an effective blacklisting of 6% of global VLCC capacity.
Limitations from U.S. sanctions coincide with four other rate tailwinds: (1) increasing seasonal demand; (2) the looming IMO 2020 sulfur-cap rule, which has boosted refinery runs and pulled multiple VLCCs from service for exhaust-gas scrubber installations (Clarksons estimates that 3% of VLCCs will be out of service for installations in the fourth quarter); (3) higher demand among importers due to concerns over future supply following the Sept. 14 attacks on Saudi oil facilities; and (4) sanctions on Iran, with those exports being replaced by longer-haul voyages from sources including the U.S.
Clarksons Platou Securities estimated that the average VLCC rate had risen to $98,400 per day as of Friday, Oct. 4, up 74% week-on-week and up 239% month-on-month. There were reports of several individual charter deals exceeding $100,000 per day. VLCC rates for Oct. 7 were estimated to be $105,300 per day.
VLCC rates have not been this high since the fourth quarter of 2015. Nor is it just about VLCCs. If larger crude tankers are not available, charterers book two Suezmaxes instead (vessels with capacity to carry 1 million barrels of crude each). Consequently, higher VLCC rates cascade down to smaller vessel classes.
In addition, product tanker rates are also boosted because certain vessels are designed to switch back and forth from “clean” (refined products) to “dirty” (crude, heavy fuel oil) cargoes. A significant number of so-called LR2 product tankers (Long Range 2, with capacity of 80,000-119,999 deadweight tons) have just switched from clean to dirty cargoes; fewer tankers in clean trades increase rates for that category.
According to Clarksons Platou Securities, Suezmax crude tanker rates were $68,300 per day as of Oct. 4, up 126% week-on-week and up 321% month-on-month, while LR2 product tanker rates were $29,800 per day, up 53% week-on-week and 46% month-on-month.
More support for stock prices
The stock pricing of U.S.-listed tanker owners is also on the rise, although not as dramatically as freight rates. Investors remain cautious on the longevity of the current spike and continue to be wary of shipping stocks in general given ongoing U.S.-China trade tensions.
“With VLCCs reaching $100,000 per day and climbing, the interest among investors is, not unexpectedly, all about tankers these days,” said Clarksons Platou Securities analyst Frode Mørkedal.
In addition to spot-rate gains, “one-year time-charter rates are also increasing, adding support to ship values, implying upside to NAV [net asset value] going forward – not just from surging cash flows, but also from higher asset values,” he said. “With both crude and product tanker equities still trading below NAV, we still see good investment opportunities in the sector. Bottom line is that investors can still jump on the tanker trade.”
Since Sept. 16, the stock price of Euronav (NYSE: EURN) has risen by 17% and shares of DHT (NYSE: DHT), International Seaways (NYSE: INSW) and Frontline (NYSE: FRO) have each risen by 22%.
U.S. crude exports continue to mount
The surge in crude tanker rates coincides with continued growth in U.S. crude exports – which is not coincidental. Exports from America to Asia aboard VLCCs that use the Cape of Good Hope route travel 2.4 times the distance as Middle East exports to Asia. By soaking up more VLCC capacity with longer sailing times, U.S. exports buoy crude tanker rates.
Argus Media reported that the port of Corpus Christi handled a record 684,000 barrels per day (b/d) of crude exports in August, up 71% from July’s volumes.
Citing data from the U.S. Census Bureau, Argus said that total U.S. exports reached 2.73 million b/d in August, up 2% from the previous month. Excluding Canada, which imports most of its U.S. crude over land, the largest buyer was South Korea (16.6% of the monthly total), followed by the U.K. (9.7%), China (9.0%) – despite a 5% tariff imposed by China on U.S. crude starting Sept. 1 – and India (7.9%).
Argus noted that two major pipelines from the Permian Basin to the U.S. Gulf Coast opened in August: the 400,000 b/d Epic pipeline and 670,000 b/d Cactus 2 pipeline. It said that preliminary data shows that Corpus Christi is on track to export 853,000 b/d in September and 900,000 b/d by the middle of this month.
The only negative news is that higher tanker rates could curb a portion of the outbound U.S. cargoes by eating into the arbitrage margins of traders. On Oct. 4, Argus said that there was “a limited export arbitrage as U.S. sanctions against affiliates of COSCO helped elevate freight rates from the U.S. Gulf.”
Ironically, to the extent arbitrages are lessened, the U.S. sanctions against COSCO (Dalian) will be lining the pockets of ship owners in Europe and Asia, while creating at least some headwinds for crude exporters in Texas. More FreightWaves/American Shipper articles by Greg Miller
Edward Kane
Tanker charges will plumett such will crude price. Just another
Quick make a buck crap as the same..
thomas
add against the small order book and the picture gets a different face