By Greg Miller of FreightWaves,
Some sayings pop up again and again in shipping circles:
“The way to make a small fortune in shipping is to start with a big one.”
“Moving cargo is what you do between buying and selling ships.”
“If analysts say the market can only get worse, buy.”
There’s also one that goes:
“If there are 98 ships and 101 cargoes, boom, 98 cargoes and 101 tankers, bust.”
Alas, there are now a lot more tankers than cargoes.
Rates are sliding, owners are capitulating, and charterers have the upper hand.
Rates for very large crude carriers (VLCCs; tankers that carry 2 million barrels of crude) from the Middle East Gulf (MEG) to Asia were down to $20,000 per day on Wednesday, with the global average assessed at $26,537 per day by brokerage Howe Robinson.
“The dam has burst, and VLCC rates have taken an overdue nosedive,”
said the brokerage Fearnleys in a new report.
“Daily earnings are still in the $20,000s [per day], but with increased bunker prices and further downward potential, OPEX [operating expense] levels could come under threat moving forward,” Fearnleys warned. “By all accounts it’s going to be a hot, long summer of discontent.”
Meanwhile, rates for Suezmaxes (tankers that carry 1 million barrels) are down to just $9,700 per day, while Aframaxes (750,000 barrels) are down to $8,200 per day, according to Clarksons Platou Securities. These rates are at or near multiyear lows and the outlook for all tanker classes remains negative.
Owners spar for limited cargoes
“High competition among [VLCC] owners in the Middle East Gulf is putting further downward pressure on rates, with our brokers expecting sentiment to weaken further into the week with smaller segments sharing the outlook,” said Clarksons Platou Securities analyst Frode Mørkedal.
“Brokers said it is clear that charterers are in the driver’s seat now with each cargo receiving a double-digit [number of] offers from shipowners. With so many owners bidding on the same cargoes, it only takes one owner to start panicking and bring rates lower,” Mørkedal said.
Argus Media reported on Wednesday that only one cargo was up for bid on the MEG-Korea route that day — with eight vessels competing for it. Argus quoted a market participant as stating that downward rate pressure “will likely increase in the short term.”
Tanker rates are falling because of seasonal weakness, OPEC+ production cuts and the beginning of the unwind of floating storage. The unloading of floating-storage cargoes both decreases demand for new transport deals and increases the capacity of ships vying for the fewer remaining transport deals.
Floating storage headwinds ahead
Evercore ISI analyst Jon Chappell told FreightWaves, “I do think a lot of the recent precipitous decline in VLCC spot rates is associated with owner capitulation, but let’s be clear on how we got here.
“VLCCs have held in much better than the midsize tanker sectors, primarily on hope of Venezuela-related sanctions and partially owing to congestion in China ports. It now appears that Venezuela will not be the next COSCO [referring to U.S. sanctions against Chinese owner COSCO in 2019, which restricted capacity] and eventually China port congestion will ease.
“At the same time, the OPEC cuts are biting deeply,” said Chappell. “You can see it in the monthly cargoes out of the Arabian Gulf. And U.S. exports have declined as U.S. production slows and the arb [arbitrage window] is not open.
“The floating-storage unwind has really yet to fully occur and should provide an overhang in the coming months and quarters,” cautioned Chappell.
“The duration of the headwinds from the floating-storage unwind will almost completely depend on the pace of demand recovery. The faster the recovery, the more painful the immediate unwind, and the quicker the return to market balance. The more prolonged the demand recovery, the less painful the depths of the rate decline but it will be longer in duration. It’s too early to call if inventories will be normalized by the normal winter peak season,” said Chappell.
Hopes pinned on fourth quarter
Randy Giveans, analyst at Jefferies, was more optimistic. “As for low VLCC rates, it’s purely a matter of too many vessels and not enough cargoes,” he told FreightWaves. “Clearly the market is very tight, as evidenced by the surge in rates when there are extra cargoes and the rapid fall in rates when there is a lack of cargoes.
“After basically six to eight months of strong rates, owners are more willing to accept weaker rates. Their balance sheets and liquidity have improved significantly in recent quarters so a few bad weeks and months won’t be very impactful.
“Regarding duration, we expect rates to remain relatively flat — but still above $20,000 per day — in July and August before a strong move in the fourth quarter. And yes, I certainly expect rates above $50,000 per day at some point in that quarter. In 18 of the past 20 years, rates bottomed in the summer and rebounded in the fourth quarter,” said Giveans.
Bet of Frontline boss
The deteriorating tanker market brings to mind a wager Robert Macleod, CEO of Frontline (NYSE: FRO), made earlier this year.
At the height of the rate frenzy, Macleod bet an analyst that VLCC rates would not revert to the $20,000- to $30,000-per-day levels seen in February at any point during the second or third quarters. Macleod vowed that if he lost the bet, he would walk the entire 300 miles between Oslo and Bergen, Norway.
Macleod needs to start walking.