Freight
Added Mar 9, 2022

Current reality to weigh on crude tanker earnings

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Following the recent news of sanction placements as well as the oil and freight price behaviour over the past few days, we give a brief update on the fate of crude tanker markets, which looks ominous for shipowners. 

The escalation of the Russian invasion continues, as the US and UK impose oil bans on Russian energy imports. However, the rally of most crude tanker rates has come to a halt. This is more evident for the trademark VLCC routes TD3C (Middle East-to-East Asia) and TD15 (West Africa-to-East Asia) which dropped by 15% which underpins that the current uncertainty unfolding in Russia has not been reflected in the freight supply-demand fundamentals in other parts of the world.

As mentioned in a previous insight, a considerable shift of the crude pattern in the face of sanctions will not have any material change in the overall demand fundamentals for crude tanker markets. This involves a scenario considering a substantial amount of Russian volumes which could be diverted from Europe to Asia. However this might not reflect reality, since Chinese buyers for now have adopted a wait-and-see approach on current developments. 

This means that these Russian barrels could be removed from the market, effectively hampering tanker, and mostly Aframax demand. A positive note for Aframax owners in the way events are unfolding has to do with the alleviation of tonnage supply. Around 7% of actively traded Aframaxes is Russian-related, which has been effectively- although not officially- sanctioned. Yet around 20% of Aframax tonne-mile demand is stemming from Russia. Taking these barrels out of the market with no replacement would unavoidably be the bearer of bad news for owners.

Aframax tonne-mile demand by origin (bn tonne-miles)

While freight rates got capped, the crude oil price rally continues unabated amidst these ever-growing supply fears. This has inevitably trickled down to bunker prices that have skyrocketed to record highs, breaking the $900/t barrier according to Argus Media assessments. Our data show that the ballasting speed of crude tankers rebounded in March after 3 consecutive months of decline. This is reasonable as owners attempted to position their vessels to fetch the increasing rates. According to our pricing screen, earnings for crude tankers (excluding VLCCs) are above break-even territory.  However, going forward, this is likely to change as the current environment signals on the one hand a freight pricing stagnation but on the other a continuation of elevating oil prices. This will possibly force earnings into the red, making slow steaming a necessity for shipowners in order to cut down as much as possible from a costly bunker bill.

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