INSW - Tides Of Fortune: Investing Insights In The Surging Tanker Sector

2023-11-27 09:21:04 ET

Summary

• The Russian invasion of Ukraine accelerated the tanker market boom, leading to increased ton-miles and a potential tanker shortage.
• Despite favorable conditions, the order book for new tanker builds remains historically low.
• An aging fleet and a forecasted rise in global oil and product demand contribute to a robust outlook for the tanker sector.
• Increasing regulatory regulations and regional production demand are additional forces adding to the tanker rising tide.

The shipping market is cyclical in nature and the tanker market appears to be in the initial phases of a multi-year boom. The Russian invasion of Ukraine accelerated the upcycle by two years, leading to an increase in ton-miles and tanker shortage. Surprisingly, the order book has yet to reflect this trend. On the back of a low order book, robust pricing, an aging tanker fleet, increasing regulations and a forecasted rise in global oil and product demand, the tanker sector is poised for a robust next few years.

Russian Ton Mile Multiplier

The Russian invasion of Ukraine caused a surge in ton-miles for transporting crude, LNG and refined products. As you can see from Okeanis and Scorpio's investor updates below, there has been an increase in crude and product flow from the Americas and Middle East to Europe along with a redirection of Russian crude and products to Asia.

It is plausible that this adjustment has already been factored into the market, given that spot rates have more than doubled since 2021 and continue to remain robust.

Historically Low Order Book

Despite the favorable conditions, the expected expansion of new build orders has not yet materialized. Possible reasons for this include the recent demand for containership newbuilds, the belief that the Russian invasion of Ukraine and associated sanctions are temporary (it may be), or the perception that peak oil has occurred.

Regardless, the order book for new builds is at historically low levels across various tanker types, exemplified by the VLCC order book, which anticipates only 11 new vessels in the next three years.

Aging Fleet

The low order book is compounded by an aging fleet. According to Tsakos ( TNP ), almost 40% of the tanker fleet is over 15 years old, and 12.4% is currently over the estimated tanker lifespan, of 20 years. With an order book dropping to historical lows, there is a potential scenario where more tankers will be scrapped than built over the next three years.

Global Oil Demand

Concerns about new tankers being ordered might be influenced by the belief that we have reached peak oil and that demand is declining. However, it does not appear that we are there yet, the US Energy Information Administration forecasts a 1-2 million barrels per day increase in demand and production by the end of 2024.

Putting 1 MBPD Output and Consumption Into Perspective

1 million barrels per day equates to 365 million barrels per year and if I assume 100% is carried by VLCC's in 2 million barrel chunks that equates to 182 shipments per year. According to Euronav (EURN) a VLCC takes an average of 6 voyages a year thus 365 million barrels divided by 2 million barrels per trip and 6 trips per year equates to an additional need of 31 VLCC's… There is one VLCC new build forecasted to be launched in 2024.

Regional Oil Production

The EIA estimates that in 2024, the increase in oil production will come from non-OPEC countries led by the United States, Brazil, Canada, Guyana (and also the OPEC country Venezuela). As these countries are already self-sufficient, the additional barrels are likely to necessitate tankers destined for Europe or Asia, a net addition in ton-miles compared to production coming from Eurasia.

Sanctions

Recent US Treasury sanction s on three companies and tankers carrying Russian crude signal an attempt to enforce sanctions in an already tight tanker market. While these specific sanctions may not lead to decreased supply, they underscore the risk of tankers being taken off the global market.

Environmental Regulations

We have yet to see the effects of the EEXI and CII maritime environmental regulations that went into effect in 2023 as the first year was focused on reporting. In 2024 each vessel will receive its first CII rating ranging from A to E based on their 2023 emissions which could lead to slow steaming and other repercussions dampening supply. The idea is for the best-rated ships to receive incentives from administrators, port authorities, and stakeholders and the worst to be put on performance action plans or removed from operation; whether this will happen is yet to be seen. On another note, the implementation of the EU Emissions Trading System is estimated to start January 1, 2024. While the full effects of these regulations are yet to be seen, potential supply reductions may occur.

Risks

The primary risk to this extended boon is a reduction in oil and product demand. While the supply is fairly well known, various factors, such as global conflicts, economic slowdowns, increased inflation, or unforeseen circumstances, could negatively affect demand and create an excess of tankers.

World War III is one of the easier-to-recognize scenarios or on the peaceful side the Russian invasion could come to an end, sanctions lifted, and global crude and product routes go back to their most efficient ways.

Riding the Tide of the Tanker

To participate in the rising tide of the tankers, various options exist, including freight future ETF (BWET), Shipping ETF (BOAT), or my preferred option of investing directly in tanker owners such as Ardmore Shipping Corporation (ASC), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Limited (TNP), DHT Holdings, Inc. (DHT), Euronav NV (EURN), Frontline plc (FRO), International Seaways (INSW), TORM plc (TRMD), and Scorpio Tankers Inc. (STNG).

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