Tankers

The double-decker tanker freight market

Maritime CEO ponders where the peak of this ‘crazy’ market will be

Oil prices have been drifting downwards. They fell 2% on November 25 as Brent closed at $83.63 a barrel and WTI sat at $76.28 a barrel, both near or at 10-month lows. The two-month ahead price dipped into contango, indicating current oversupply with near term delivery prices lower than the two-month out price.

Falling oil prices are down to two causes. First, OECD nations look set to stay in or enter recession, in part self-inflicted as Europe in particular seeks to disentangle itself from oil and gas supplies from Russia. Secondly, China continues to struggle to balance public health and the economy. Chinese oil demand is running about 1m barrels per day lower than seasonal expectations due to lockdowns as daily covid cases reached a record on November 25.

Against these worries, the oil price cap under discussion and the oil import bans, set for December 5 and February 5 for crude oil and oil products respectively, are expected to lengthen global supply chains as EU imports will have to come from further afield. If OPEC, following a meeting between Saudi Arabia and Iraq last week, decides to cut output to support prices, then there will be a scramble for non-OPEC, non-Russian supplies of crude and products.

For these reasons, and despite negative macro-economic indicators, bullish sentiment has presided over the tanker markets, driving up freight rates particularly for crude oil tankers during November, though products rates remain at historically high levels. Sentiment is also based on OECD inventories sitting at their lowest levels since 2004. The IEA’s November report notes that short-term oil oversupply could quickly change as “approaching EU embargoes on Russian crude and oil product imports and a ban on maritime services will add further pressure on global oil balances and, in particular, on already exceptionally tight diesel markets.”

Benchmark VLCC earnings as reported by the Baltic Exchange hit $57,504 a day for the first 25 days of November, up from $34,937 for October and marking six straight months of increases from a low of $-30,069 in June this year – that’s an increase of over $87,500 a day. You can get higher assessments from brokers, with Poten rating a modern, scrubber-free VLCC at $94,500 a day on November 23.

Suezmax operators are even happier than VLCC operators, with short tonnage availability in West Africa and for voyages from the Middle East via Suez into the Med continuing for the last month. These have driven the S2 average from $64,186 for October to $95,394 for the first 25 days of November. Aframax average earnings have also risen sharply from an average of $64,186 for October to $83,696 for the first 25 days of November, basis Baltic Exchange data.

The Baltic Dirty Tanker Index hit 2,496 points on November 23, an altitude not seen since December 8, 2004 when the index stood at 2,458 points, surpassing even the 2008 peak of 2,347 achieved on July 23 that year. The all-time peak of the BDTI was 3,194 points on November 17 2004. It is possible to find market bulls who believe that peak will be surpassed in the current cycle, mostly based on the very small orderbook for oil tankers.

Note though that the Baltic Exchange has stopped reporting Russian export freight rates which might mean that it is not possible to compare history with today’s market. The so-called ‘dark fleet’ of oil tankers circumventing sanctions is reported by some agencies to be nearly 200 strong, and may have been driving up the secondhand market for middle-aged oil tankers, as operators willing to carry Russian (or Iranian) crude at high risk-premiums get ready to operate in an uninsured, self-insured or Russian insured capacity.

Freight market excitement has extended to the product tankers with Affinity describing the LR2 market in particular as “crazy beyond all expectations”.

The BCTI average for the year stood at 1,168 as of November 25, which is more than double the 2021 average of 530 points and the highest since 1,155 points in 2008, which was also the last time the index stood at more than 1,000 points.

This double-decker tanker freight market, with the clean and dirty freight indices reaching heights not seen for nearly 20 years, has not quite set fire to tanker equities, but investors who did read the runes early are looking at big increases already this year. Once the investment bankers smell the breeze, the chances are that 2023 will see some M&A action. ●