Fearnley Securities has downgraded leading tanker owners as it said the chances of improved rates have "gone for the summer".
The Norwegian investment bank sees a challenging market in the short-term for both crude and product carriers.
The firm, part of the Astrup Fearnley Group, has downgraded the whole sector to either hold or sell, from buy ratings previously.
Fearnley has recommended investors sell down positions in Frontline, International Seaways, Hunter Group, Ardmore Shipping and Scorpio Tankers.
But the bank's analysts are remaining "constructive" for 2021 due to to positive quarter on quarter production figures, quick destocking from stored tankers and a low vessel orderbook.
Fearnley saw the first quarter as "profit-taking season" for tanker shares and had held out hope for a final rate spike in late May/early June if onshore storage capacity had been filled.
Spike not going to happen
However, analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said: "With the oil market finding its feet again we are calling off the final potential spike in rates, instead expecting VLCC rates in the $20,000s for much of the third quarter and $43,000 per day in the seasonally stronger fourth quarter."
A fast-tracked OPEC+ meeting in June suggests an extension of deeper cuts to production, they argued.
And they said overall global crude supplies are low due to forced shut-ins, while there will be a rapid de-stocking period starting in the second half, "albeit much slower than previously anticipated", releasing anchored vessels back into the market.
Fellow investment bank Cleaves Securities, which downgraded the sector last month, said VLCC owners had managed to push spot rates up significantly at the start of last week as a number of cargoes emerged in the Middle East and West Africa against a limited tonnage list.
"Despite a softening sentiment towards the end of the week, available tonnage is limited and owners will likely make another push for higher rates if activity keeps up," the firm added.
Fearnley is quoting VLCC spot numbers from the Middle East to South Korea at $59,436 per day on Tuesday, down 16% week on week.
'Much rosier' in medium term
The bank views the medium-term outlook as "much rosier", as oil production starts to come back.
"Moreover, we have a record low orderbook and the largest phase-out potential since the single-hull period (keeping in mind how scrapping in 2018 contributed to a much stronger 2019/first half of 2020)," the analysts added.
The main downside risks are new Covid-19 related outbreaks and production not picking up as quickly as anticipated, they said.
Prices under pressure
Fearnley is forecasting asset values to come under pressure over the coming months, reducing owners' net asset values (NAV) by up to 50%.
The company has revised its VLCC resale value down $2m to $92m, for example.
"We expect further softening in values in the months to come as recent transactions have had a major cash flow element, ascribed to the super profits seen in March/April," the analysts said.
"We also expect more tempered dividend announcements for the second quarter," Fearnley added.
Fearnley relies on NAV in valuing tanker stocks, primarily due to the liquid second-hand market.
"Newbuilding prices tend to be the stickiest, but given the dire situation at the shipyards we also see downside risk to these values," the investment bank said.
Prices could fall between 10% and 20% for newbuildings, resales and five-year-old vessels, Fearnley forecast.
The company said newbuilding prices have largely dictated the rest of the market in the past.
"However, there is a big difference this time around, namely the lack of orders (and backlogs) at the yards coupled with both surplus capacity and a softer economic climate," Fearnley added.
"Hence, we expect resale values to bottom out around the $80m mark, suggesting 13% downside from current valuation," the bank said.
