An explosion of political tension in the Middle East could provide a boost to the tanker market at a time both the crude and product sectors are on an upward curve, according to a respected shipping analyst.
Jon Chappell of Evercore ISI says downward oil demand revisions are playing tug-of-war with rising tensions in the Middle East following Iran’s seizure of the 50,000-dwt Stena Impero (built 2018).
His comments come with tanker stocks showing strong climbs this year after a fast start to 2019, meaning the “easy money” has been made in by investors in the present cycle.
While Chappell describes reduced oil demand forecasts as a “potential red flag” to its tanker market read, geopolitical tension historically provides a short-term boost to rates.
Dissecting the headlines
“We still believe that the muted capacity picture and favorable impact from IMO 2020 will lift tanker rates later this year with further acceleration in 2020, and the stock prices should resume the favorable momentum from earlier this year as an earnings/cash flow follow through is required to take the group to the next level,” Chappell said.
“We will also still monitor the aforementioned headline-grabbers, with more apparent demand destruction a potential risk, but further escalation of Middle East tensions a possible near-term positive catalyst.”
As TradeWinds has reported this week, tanker traffic in the Middle East has been falling during the past month after attacks on the 110,000-dwt Front Altair (built 2016) and 27,000-dwt Kokuka Courageous in June.
“There is a rule of thumb in the shipping world that geopolitical-related disruption to trade is usually good for tanker markets, at least in the near-term," Chappell noted.
Iran has become more hostile since the seizing of the 301,000-dwt Grace 1 (built 1997) by British marines in Gibraltar.
Proven disruption
And despite international backlash against the Stena Impero capture the tanker and its 23 crew remain in Iranian hands.
“Most importantly, though, the nation has proven that it can disrupt trade through the Strait of Hormuz,” Chappell said.
“For now, it appears British-flag ships are avoiding the region and insurance premiums have spiked.
“But if Iran attempts to further disrupt trade in the important Strait of Hormuz chokepoint – through which nearly 20% of global crude oil trade passes – concerns about availability of oil could lead to a near-term spike in tanker demand as charterers/oil companies attempt to ensure access to the commodity.”
Eight of the nine tanker stocks covered by Evercore have climbed by between 31% and 63% this year, driven by anticipation of a cyclical upturn.
Ardmore Shipping and Scorpio Tankers are the top performers, both rising by over 60%, with DHT Holdings 58% to the good.
“The easy money has clearly been made, but the only way for the stocks to continue to work is for this optimism to translate into actual results, namely favorable earnings momentum, cash flow generation, and asset value appreciation, “Chappell said.
“Despite some recent demand fears, we believe the industry, both crude and product tankers, is set up well for a cyclical upturn, with demand growth expected to outpace capacity expansion beginning late this year and fleet utilization pushing up further in 2020.”
