Supply and demand. Those two basic economic principles are nowhere more evident than in the market for oil tankers. As Covid-19 lockdowns damage oil demand and worries about crude oil storage options mount, the prices to charter ships that carry both crude and refined products have gone through the roof. The demand for floating storage -- renting an oil tanker for the purpose of holding the cargo until oil prices improve -- has increased exponentially with the recent plunge in crude oil prices.
The spreadsheet below has all the details, but these are not the types of gains that are being experienced by U.S. consumer stocks that are being feted by Wall Street. Netflix (NFLX) delivered a 22.8% year-on-year increase in subscribers for 1Q2020. Good number and solid comp as stay-at-home viewership finally shook Netflix's U.S. viewership out of its doldrums and international subs continued to rise. Procter & Gamble (PG) reported 1Q2020 organic sales growth of 6% including 10% growth in the U.S. Best comp in decade as consumers stocked up on Tide and other household products.
That said, as of last Friday, the average charter rate for a Very Large Crude Carriers had increased by 740%. With industry publication Tradewinds this week reporting new fixtures for charters commencing in May at a rate of $220,000/day, the real-time increase on a year-on-year basis is more like 800%. Now that's a comp!
It's not just the biggest of the boats, either. As the table shows, charter rates for smaller oil-hauling ships, Suezmaxes, have risen 200% year-on-year and rates for the next smallest level of ships, Aframaxes, have more than doubled. Those ships carry unrefined "dirty" crude oil cargoes. As refineries struggle to find places for their offtake, seemingly as scarce as storing spots for crude, rates for the tankers that carry refined "clean" products have also increased strongly. Note the figures for long-range product tankers (LR1 and LR2) in the table below.
I first started investing in shipping stocks during the surge in dry bulk shipping rates in the 2005-2007 period. I am not in dry bulk now, as the main freight index for those cargoes -- coal, iron ore, grains -- the Baltic Dry Index, is still depressed. That mania in shipping stocks 15 years ago, however, taught me a valuable strategy to play shipping stocks in a period in which demand vastly exceed is supply.
Buy as much as you can!
In all cold, sang froid seriousness, I have stuffed my fund full of securities in oil shipping companies. I am using the maximum amount of leverage afforded to the firm by its prime broker to do so. The virtuous thing about such a strategy, despite the obvious risks, is that rising values for my shareholdings in oil tanker stocks have afforded me the opportunity to borrow more to increase my positions in those same stocks, and, damn the torpedoes, I am doing it!
At some point this trade, like all trades, will reverse, but I just don't see that happening in the near-term. It is so much easier for oil consumers to stop consuming than it is for oil producers to stop producing. I believe these disruptions in global crude markets will last at least into the fall.
Smart operators are demanding longer-term charters for their ships -- I am hearing many reports of six-month charters this week from my shipping industry sources. As the weather warms the buyers of that cargo space --trading firms, oil producers, etc. -- will begin to think ahead and worry about the capacity to move those shipped cargoes as we head into the winter. The vast majority of the world's population lives in the Northern Hemisphere. Any shipping executive will tell you that demand for oil, and ways to ship it, increases as the average temperature decreases in October and November, and demand for heating oil increases. Given the extraordinary moves in the oil markets in the last two months, if you want to book a ship to haul oil then, you may just have to book it now. That is great for the shipowners.
So, that's my story, and I am sticking to it. And with it. I can't tell you exactly what I am doing for my firm but, as I always stick to RM's strict (and admirable) guidelines for full disclosure. So, here is a list of companies in which we currently has an economic interest: (NAT) , (NNA) , (TNP) , (EURN) , and (STNG) .
| Ship Class | Avg Rate YTD 2019 | Avg Rate YTD 2020 | Avg Rate Wk 4/17 |
| VLCC | 25.6 ($,000 per day) | 103.8 | 185.7 |
| Aframax | 22.1 | 59.5 | 74.8 |
| Suezmax | 18.1 | 44.4 | 38.8 |
| LR1 | 19.3 | 35.9 | 86.0 |
| LR2 | 14.7 | 26.8 | 59.5 |
