How tankers thrive amid energy crisis and war

Global crises and geopolitical chaos are bad for most businesses. Not so in industries like defense and energy shipping. Go to a commodity shipping conference in troubled times and you’ll hear a lot about how optimistic all these issues are for freight rates.

The focus of Marine Money’s New York Ship Finance Forum on Thursday was the deepening global energy crisis, the war in Ukraine, looming sanctions on Russia, the evolving situation in China — and how phenomenal the rate outlook is for tankers carrying crude , refined petroleum freight products and liquefied natural gas.

“The party hasn’t even started yet”

The sweet spot for rates is when disruptions are severe enough to cause inelastic ship capacity to lag behind demand, but not severe enough to crush demand and collapse the global economy. Bad news is good news until it gets too bad.

“The market likes chaos and dislocation,” said Bart Kelleher, CFO of Ardmore Shipping (NYSE: ASC).

According to Robert Bugbee, President of Scorpio Tankers (NYSE: STNG), “The party hasn’t even started yet. The host may have a few drinks, but no one is there. People are in the pub waiting to go to the party later. The product tanker market is not even beginning to be put under pressure.

“What we’re worried about, and I’m sure some of the other people here are worried, is that this is going to be too good,” Bugbee said. “This could be crazy. We can’t do the math now to be challenged [future] Demand for products that match the ships that can transport them.”

On the geopolitical front, the war between Russia and Ukraine has been a boon for tankers. A moderator asked a tanker panel: “Do you have any concerns on the horizon – maybe [Russian President Vladimir] Putin concedes?”

But geopolitical chaos, like the energy crisis, is only good for rates if it doesn’t go too far. LNG shipping panellists warned of dire consequences in the event of a war between China and the US.

“If that happens, we’re all screwed,” said Oystein Kalleklev, CEO of Flex LNG (NYSE:FLNG). “It’s almost not even worth thinking about because the consequences are so big. Russia and Ukraine would look like a small bump in the road compared to what would happen. You would have an energy shock like you have never seen before. The whole world economy would stop. It would be like the Great Depression.”

“The worst energy crisis since 1979-1980”

Average spot rates for very large crude oil carriers (tankers carrying 2 million barrels of crude oil) are now over $100,000 per day. Bugbee said one of Scorpio’s product tankers has just been booked at $98,000 a day. Average spot prices for diesel-powered tri-fuel LNG tankers are now over $450,000 per day.

The more different parts of the world suffer from energy shortages, the higher the demand for ships to balance the supply. That’s good for tanker owners – until the energy supply is exhausted and consumer and industrial demand is destroyed by high prices.

“We now have the worst energy crisis since 1979-1980,” said Francisco Blanch, head of global commodities at Bank of America Securities.

“Back then we had a global oil crisis. Today we have a crisis on the gas and electricity markets. For the most part, these are local prices; As they like to say in financial jargon, this is a “glocal” crisis. It hit China a year and a half ago and Europe a year ago. And unfortunately, I think it’s going straight to the Northeast US.”

Utilities in New England depend on LNG. Import prices have skyrocketed due to war-related demand in Europe. In addition, many New Englanders use heating oil. “Northeast heating oil inventories are at their lowest on record this winter,” Blanch said. “All they can do now is firstly pay and secondly pray for warm weather.”

Globally, he said, government strategic oil stocks are at their lowest on record, and commercial stockpiling is also low. Substitute oil production is limited. “If you have no inventory and no spare capacity, any incremental uptick in demand simply has to be met by higher prices and lower demand. You have to limit the demand,” he said.

Fight for LNG to get hot in 2023

The countries are bidding against each other for supplies of LNG and petroleum products. The losing bidder lacks the energy. The shipowner who transports the cargo wins either way.

Gordon Shearer, senior project development consultant at Poten & Partners, said: “India, Pakistan and Bangladesh made big bets that they could buy LNG at spot prices and they have taken the brunt of this European-driven price swing. We have seen the destruction of demand and blackouts in Pakistan and Bangladesh and the diversion of cargo from India.”

The competition for LNG supplies will intensify even more in the coming year. According to Jason Feer, global head of business intelligence at Poten & Partners, Europe was able to replenish stocks this winter “because they had been piped gas from Russia for four to five months in addition to LNG imports”. They also didn’t face as much competition from China, where imports fell by 20%.

“The theme for Europe will be next year,” Feer said.

Europe won’t get Russian pipeline gas in 2023 and Chinese LNG purchases are likely to recover. Blanch also noted that significantly more regasification capacity (LNG import) than liquefaction capacity (LNG export) will come online over the next year. “So we need to feed more mouths, but we don’t really have the amount of LPG to feed those mouths,” he said. “This will create more arbitrage opportunities and longer travel distances and therefore very stable LNG [shipping] Prices.”

The fight for the diesel

The same competition for resources is playing out in the diesel markets and in the refined product markets in general.

“The big question is: do we have the refined products to do it justice [post-pandemic] Reopening of the world economy? I think the answer is no because we are severely underinvested in refineries,” Blanch said.

According to Arthur Richier, Head of Strategic Partnerships at Vortexa, “The world needs diesel and we are very short on diesel. Europe takes a lot of this diesel from other economies, especially Latin America. Europe has the money to outbid buyers in Latin America.”

The scramble for diesel fuel is also causing fallout in other refined product markets.

“Because diesel markets are extremely tight, refiners have adjusted yields to produce much less naphtha and gasoline,” Richier said. “Some of these trades, like the Atlantic Basin gasoline trade and the eastbound naphtha trade [to Asia]have suffered.”

Sanctions against Russian oil loom

The energy crisis caused by underinvestment was exacerbated by the war. The conflict has already severely impacted the crude oil, product and LNG shipping markets, driving rates higher.

It will have an even greater impact as sanctions create a whole new level of chaos. From December 5, the EU will no longer import Russian crude oil transported by sea. UK and EU shipping insurance is no longer available for Russian crude oil exports unless the oil price is below the G-7 and EU price caps. The same restrictions apply to Russian products from February 5.

EU replacement imports will travel much longer distances and increase demand for tankers, measured in ton-miles (volumes multiplied by distance). The question is how much upside is offset by the downside of lower Russian export volume.

“We will lose about a million barrels of crude oil and petroleum products [per day] when those sanctions fall,” Blanch predicted. “Why someone picked them [sanctions] Dates in the middle of winter, no idea. I am not sure if the politicians understood what they are doing.”

Richier estimated that 2 million barrels per day “will be withdrawn from Russia next year for logistical and sanctions reasons.”

Russia will be able to ship some of its crude oil aboard “shadow tankers,” vessels insured through non-Western insurers that do not operate in US dollars. However, the availability of shadow product tankers to transport Russian diesel will be far more limited.

“With clean [products] Exports are a completely different story,” Richier warned. “Whether the oil price cap is agreed or not, Russia will face a physical logistics problem to move these cargoes. There simply won’t be enough ships to transport these Russian barrels.”

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