Teekay Tankers is looking toward potentially bullish tanker supply factors, namely discharge delays, floating storage and the orderbook environment to combat depressed crude cargo demand in the near and medium term, CEO Kevin Mackay said Thursday.
“In the near term, we anticipate that rates will remain volatile due to a continued mismatch between oil supply and demand and an ongoing need for floating storage,” Mackay said in the company’s first-quarter earnings call.
The company recorded the highest spot rates for their mid-size tanker fleet in more than 10 years in Q1 2020, as a collapse in crude prices from a failure of OPEC+ countries to reach a supply cut agreement led to a deep contango structure that boosted charterer interest in floating storage utilization and healthy spot cargo demand.
Entering Q1 2020, the cost of taking an Aframax on a USGC-UK Continent/Mediterranean run was at sky-high levels, averaging $45.55/mt in January, only to peak again on March 16 at w197.5, or $40.25/mt, and April 23 at w205, or $41.78/mt. Freight for the route has since dropped to w85, or $17.32/mt, a total decline of 58.5% since the April spike.
Freight across all major dirty tanker ship classes has been on the decline since the beginning of May as production cuts of at least 9.7 million b/d by OPEC+ countries came into play and as continued demand destruction from the coronavirus outbreak has left cargo inquiry dismal.
Global crude demand is expected to fall by 8.6 million b/d in 2020, according to the most recent estimates released May 14 by the International Energy Agency.
FLOATING STORAGE AND DELAYS TIE UP SUPPLY
Increased floating storage demand has lent support to freight rates across the board since the mid-March crude price fallout but has since declined as the crude contango structure continues to narrow. Although fresh inquiry has fallen, impacts from high activity in March and April could continue to lend support to rates, including discharge delays at ports and timely unwinding of floating storage deals.
Teekay estimated that over 100 crude tankers are currently being utilized for traditional floating storage, defined by being idle for at least 30 days, while an additional 100 ships are seeing delays at ports, sitting on demurrage for periods of seven-20 days, Mackay said on the call.
“All told around 10% of the crude tanker fleet is being used as some form of floating storage, thereby reducing the number of ships available for transporting cargo,” Mackay said. “This tightening of available fleet supply combined with healthy cargo supply caused a significant increase in tanker utilization during the first quarter.”
Other dirty tanker owners, who jumped on the opportunity to lock in high daily earnings on storage or time charter deals at the end of Q1 and the beginning of Q2 2020, are expecting to see positive fallout from the fixing spree in the coming year.
Since the start of the year, Teekay has entered into five one-year charter agreements for Suezmaxes at an average of $45,600/d one six-month charter at $52,500/d, and three one- to two-year Aframax charters at an average of $26,750/d, the company said.
At least 20% of total spot available days for Teekay’s fleet will be booked for the next 12 months.
BULLISH ORDERBOOK TO BOOST OUTLOOK
Teekay also expects fleet growth to lend support to freight into the coming years as newbuild orders remain depressed on owner uncertainty of upcoming environmental regulations.
“Very low tanker fleet growth due to a small orderbook and high scrapping may lead to a faster rebalancing than in previous market cycles,” Mackay said.
The current order book as it stands is extremely bullish, with newbuild orders at only 8% of the total global fleet, a 23-year low, according to the company.
In addition, the company expects higher rates of scrapping in the near future, with approximately 19% of the mid-size tanker fleet 15 years or older.