Oil prices and tanker earnings have been moving in opposite direction for almost two months — but a senior analyst warns this correlation might not necessarily last.
In a webinar held by Poten & Partners on Thursday, a participant asked whether tanker markets could stage a recovery if crude prices weaken later this month.
To this, the brokerage’s tanker research head Erik Broekhuizen replied: “The answer is, not necessarily.” Much would depend on if the market structure can lead to further floating storage demand, he said.
The bull runs for crude tankers began in early March when the prompt oil price collapsed in relation to forward prices, leading to a wide contango that incentivised floating storage.
At that time, the Opec+ failed to agree on a supply cut despite a historic collapse in global oil consumption amid the coronavirus pandemic.
“The storage happened because there was a huge amount of crude and demand destruction,” Broekhuizen said. “That creates this enormous contango and made it very profitable to store crude.”
Complex dynamics
Kpler data showed a total of 143m barrels of crude were stored at sea as of Thursday, not far from a record high of 146m barrels on 28 April.
However, major producers have started to reduce crude production in recent weeks, while oil demand shows signs of revival as some countries ease lockdown measures.
This has prompted a spike in prompt oil prices, a narrower contango, fewer incentives for floating storage and a sharp correction of tanker earnings, according to market players.
Some analysts have expected oil prices to retreat later in May, saying the pace of demand recovery is overestimated. But a falling market does not always result in wider contango, according to traders — for example, if there is evidence of a second wave of pandemic this winter, contango may actually narrow as forward oil prices drop more than prompt cargoes.
Broekhuizen suggested the time spread in oil prices would provide a better guidance than their general direction. Tanker markets may be “reignited again” if oil remains in contango and more floating storage demand emerges, he said.
Slow spot trade
With a general spot cargo lull across the globe, shipowners have been cutting rates to secure business since late April.
According to the Baltic Exchange, spot VLCC earnings on the Middle East Gulf-China route fell to $51,953 per day on Thursday from $169,491 on 27 April.
Average suezmax earnings eased to $41,016 per day from $89,848, while aframax fell to $33,633 per day from $80,469.
Poten’s spot charter head Patrick Brennan said this may have reflected the waiting game of charterers rather than a shift in supply-demand dynamics, with Middle Eastern producers not expected to reveal their June loading programmes until mid-May.
“Even though the fundamentals is one thing, the sentiment is equally important,” Brennan said.
