The surge in demand to store crude oil at sea is a short-term benefit to tanker operators, but could have a longer term impact for the whole tanker fleet
VLCC owners and operators are being offered rates of between US$70,000/day to US$90,000/day for storage contracts, which is an opportunity to lock into firm rates and avoid the volatilities of the spot market. Doing so means missing out on the spikes in the spot market. Last week, Clarkson Research Services reported WS 210 on the VLCC Middle East Gulf to West Coast India route, a time charter equivalent earnings rate of US$241,000/day.
The average spot day rate for VLCCs so far in 2020 is nearly US$95,000/day – a remarkable average, but owners and operators are well aware that in 2018 the average was only US$15,000/day. That level is below opex on a newbuilding.
Speaking at the 14th Annual Capital Link International Forum, which this year was conducted entirely online, Tsakos Energy Navigation chief executive officer and former INTERTANKO chairman Dr Nikos Tsakos noted that the combination of the actions of Saudi Arabia and the Covid-19 coronavirus had created once in a generation conditions in the tanker market. “We are beginning to see storage on Aframax tankers,” he said.
The crude oil panel, led by Citibank head of airfreight, surface & shipping research Christian Wetherbee, collectively agreed it was somewhat embarrassing how well the tanker industry was doing out of the crisis but there are problems ahead.
One immediate issue was that of crew. Crew on a VLCC are naturally confined and in an effective Codid-19 coronavirus lockdown for months at a time, but eventually they need to be repatriated. Ports and terminals are struggling with the crew change issue and there are calls for seafarers to be classed globally as key workers.
A second issue is that tankers will begin to fall outside the charterers vetting regime. Ridgebury Tankers partner and chief executive Robert Burke noted that a tanker does not suddenly deteriorate overnight when the certificate expires. He suggested it was an issue to be addressed at an administrative level and could be resolved through granting waivers and co-operating with vetting suppliers.
Turning to the question of crude oil demand and the impact of storage, Frontline Management chief executive Robert Hvide MacLeod noted that even though an estimated 20M b/d of crude oil was being over-supplied into the market, it was not a simple matter to turn off production. “Turning off production cannot be done instantly. It is not like a garden hose – it is something that is done over time. I would also claim that we are building inventories five times faster than normal.”
Mr MacLeod estimated that commercially available land-based storage was in the region of 300M bbls. “It is dropping fast,” he said. Estimates for the speed of inventory building range from 10M b/d to 20M b/d. This suggests the available commercial land-based storage will be full in 30 to 60 days. This is the reason oil traders rush for tanker storage.
How many VLCCs are available for storage? Euronav chief executive Hugo De Stoop said “It depends on the rates. [If rates are high enough] the entire VLCC fleet is available for storage. Spot is now US$100,000/day. We are being offered storage contracts of 6-8 months at between US$70-90,000/day depending on location and if there is a trading option. It is a good rate. It is also beneficial for those that stay in the spot market as it restricts the supply of vessels,” he said.
“The cherry on the cake is usually the first vessels that go into storage are older vessels. When they are released from storage it is usually because the world is in a different place,” said Mr De Stoop.
After having been static on storage duties for months, elderly VLCCs might need to go into drydock to reverse the effects of storage, such as fouling in the raw seawater intakes and on the hull, propeller and rudder. Also, the necessary tickets to trade such as charterers vetting may have lapsed. The cost of the drydock may outweigh the foreseeable profits and lead to the vessel being sold for recycling. This will also reduce fleet supply. “Those ships will be eliminated,” said Mr De Stoop, “The orderbook is limited and maybe smaller in the future.”
Scrapping post-storage elderly VLCCs and a shrinking orderbook would limit supply as demand returns and could produce a golden era in the large tanker market similar to that enjoyed by the Capesize dry bulk carrier market between 2004 and 2008, noted one operator.