Tankers Working Hard
Tankers, both crude and product, are finding a new role in the global economy.
Snakes and Ladders, Pipelines and Tankers argued that the Russian invasion of Ukraine would lead to a re-stacking in energy infrastructure that would hurt fixed pipelines and benefit flexible tankers. (See Zoltan Pozsar at Credit Suisse for more of the dynamics.) It recommended buying a basket of DHT, Torm, Teekay Tankers and International Seaways. Six weeks on, the basket has performed well (up 30.5% ), with the exception of DHT (down -4.5%). With three of the companies reporting Q1 earnings in early May, it’s time for an update.
The New Dynamic: Re-Routing Oil
As the two charts from Teekay Tankers show, there has already been a significant re-configuration of global oil demand subsequent the late-February Russian invasion. The chart highlights two trends. First, Russian oil is increasingly heading east, particularly India, according to Teekay. Second, US Gulf Crude is making its way to Europe at the highest rate since March 2020. As pipelines slow, tanker demand is rising.
The New Dynamic: Higher Refining Margins and Demand for Diesel
A recent notices highlighted the decline in diesel inventories in the US, particularly around New York. Over the last couple of weeks, this has become a bigger story with very real concerns from Brazil to Sri Lanka, the US to the UK.
For the product tankers, shifting refined fuel around regions and the world, this diesel shortage is proving profitable. Teekay Tankers was asked how this shortage is impacting demand for ships:
the products market is very tight right now, especially diesel, inventories are low … due to a couple of factors … demand has recovered … since the pandemic and inventories have been drawn down. There's a regional mismatch … in the Western Hemisphere, refineries are operating at very high throughput, while there are refinery closures in the Atlantic, predominantly Europe. So now demand has come back, those refineries are having to work hard. There's more spare capacity in the East, … we would look toward Asia and India and the Middle East to supply the volumes into Europe … that's driving ton-miles, products having to move much longer-haul … Refinery throughput is going to have to increase where it can to meet that demand, and that's going to continue to drive the demand for product tankers…
Simply, as crude is refined, it is moved around the world: the more refining activity, the more ship movement.
International Seaways provide a chart showing the refining margins that are creating increased demand for product tankers. Until these margins return to more historic levels, demand for product tankers remain high.
Tight Shipping Market
As was originally highlighted, the tanker market, like so many other markets for capital goods, has become increasingly tight. The charts below show an industry where fleets are ageing, the incentives to recycle ships are increasing, and shipyard order books are full. As a consequence, if pipelines are in the wrong place, or redundant, due to the Russian invasion, the market for tankers will continue to improve for the foreseeable future.
Managing the Position
The position has been a profitable one to date and will likely remain so for a little while yet. As was originally mentioned, however, tanker capital is not valuable capital. There are high capital costs with commensurate financial leverage. It requires treading carefully. Two near-term events will be worth watching. First, any peace deal. The proposed Italian peace deal involved the removal of all sanctions on Russia, with a return to previous energy infrastructure. Second, Torm, the best-performing stock will report earnings in July. This should be an important update for the market.