Tanker owners may have one final chance to bank big earnings from the spot market before the current super-cycle winds down.
Investment bank Fearnley Securities said there could a last rates spike later this month if onshore storage capacity is filled.
The VLCC and suezmax sectors have benefited from vessels bring taken out of the market to store a glut of Middle East Gulf (MEG) crude in recent months.
But owners and analysts are unanimous in the view that the boom will end this year as stocks are drawndown.
On Monday, Saudi Arabia announced a further 1m barrel per day (bpd) reduction in June production to 7.5m bpd.
"It is clear Riyadh is keen to accelerate the rebalancing, with May output said to be 8.2m bpd instead of the targeted 8.5m bpd," Fearnley said.
The United Arab Emirates and Kuwait are also chipping in with a combined 180,000 bpd cut.
"This shouldn’t be too surprising seeing Saudi raised its official selling price for June barrels far more than what is implied from the gross product worth (GPW) formula," analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said.
"This could leave Saudi seaborne exports as low as 6m bpd. However with domestic demand weak, Saudi runs could remain low for the coming months – leaving more room for exports."
GPW is calculated by multiplying the refined product yield of each barrel with the price of the resulting refined products in the spot market.
Shut-ins surprise
May is now showing a 230m barrel crude build-up, while June is showing a 4m barrel draw-down, Fearnley said.
"The pace of output shut-ins has been quicker and deeper than anyone expected, which is likely why March and April stock builds will be lower than most analysts expected," the analysts said.
"Removing 12m barrels per day of OPEC+ production and 3m to 5m bpd of rest of world production within a short time frame is obviously also hurting the tanker market."
They noted that tonnage on time charter from oil companies and traders are being put back into the market.
"We could see a last spike in late May into June should onshore capacity actually run out, but should the oil market balance or start to destock already in June the recent drop in rates would mark the end of this up cycle," the Fearnley analysts said
On the refining side, independent refineries in China’s Shandong province have lifted runs from 55% in March to 73.5% in April, ascribed to healthy margins on the back of cheap crude, the bank added.
In the US, however, refiners are facing above average gasoline and distillate stocks, and so far product prices are lagging the recent spike in crude.
Equity story becomes less compelling
The analysts said all these factors are creating a "less interesting equity story".
They are forecasting VLCC rates to average $30,000 per day in the third quarter and $40,000 in the fourth, from around $55,000 per day now.
This is likely to put pressure on asset values into 2021.
"We expect a drop in investor interest as the super profits disappear, leaving risk on net asset values through lower asset values and equity prices through net asset value discounts (tankers typically trade with a 10% to 30% discount to steel in a down cycle)," the analysts added.
Cleaves Securities said VLCC spot rates continued to fall last week, but brokers seemed more optimistic by Friday as they posted a first rise since 21 April.
The investment bank has upgraded DHT Holdings, Frontline and Teekay Tankers from sell to hold, with target prices unchanged.
Head of research Joakim Hannisdahl said the only motivation was the fall in share prices.
Fearnley described the market as slow but steady for VLCCs on Tuesday.
There are still May MEG cargoes left to fight for, added the outfit, the investment banking unit of shipbroker Fearnleys.
The firm pegged floating storage deals at around $45,000 and $35,000 for six and 12-month terms respectively, "although there is certainly less action now than when the six months spread were double digits".
