The world lacks diesel. Product tankers could win big ones

Retail gasoline prices in the US rose 45% year on year. Diesel fuel used by American truckers has grown by 75% and has just reached an all-time high. But it’s not easy the American problem. The pain at the pump is global. And specialized tankers that transport diesel, gasoline, jet fuel and other petroleum products from one country to another have excellent positions to make a profit.

With the exception of the export ban (which China is currently considering), fuel goes to where it brings the most return. Example: while US diesel prices soared, US diesel exports rose. Because demand in other countries – especially in Latin America – is higher.

Exports of distillate fuel from the United States in early April reached 1.74 million barrels per day (bpd), approaching a record high, according to preliminary data from the Energy Information Administration (EIA). Total exports of all petroleum products to the US in April grew by 28% year on year.

“There was a direct panic over the purchase of diesel fuel,” said Anthony Gurney, CEO of Ardmore Shipping (NYSE: ASC), during a conference call on Wednesday.

Ardmore specializes in MR tankers, a class of vessels with a carrying capacity of 25,000 to 54,999 tons of deadweight (DWT). Clarksons Platou Securities estimates that as of Friday, modern MRs are earning $ 49,800 a day in the spot market. This is three times the average rate for the whole of 2021. Clarkson puts the break-even rate for such ships at $ 18,000 a day.

“The world really craves diesel, and it’s causing the oil refinery to be profitable,” said Lois Zabroki, CEO of International Seaways (NYSE: INSW), during a conference call on Wednesday.

The INSW product tanker fleet mainly consists of MR and LR1 (55,000-79,999 DWT). Modern LR1s earn $ 49,800 in the spot market. According to Clarkson, this is well above the break-even level of $ 19,000 a day for such ships. Current MR rates are more than twice the 2017-2021 average for this time of year.

The war exacerbates the shortage of diesel fuel

The global diesel market is “extremely tense,” and the war between Russia and Ukraine has “exacerbated the global diesel shortage,” said James Doyle, head of corporate development at Scorpio Tankers (NYSE: STNG), during a conference call on 28 April. According to him, before the invasion, Russia exported about 1 million b / d of diesel fuel to Europe. This volume has fallen sharply. “But the shortage of diesel fuel in Europe is not new,” he added. “And the deficit goes beyond Europe, to Latin America and Africa, which have similar shortages of diesel.

“For our MR, the highest growth was for ships going from the Persian Gulf to Latin America, which has less to do with Russia and Ukraine, and more due to increased demand,” Doyle said.

“We expect the market to be even tougher with increased competition for distillate molecules as demand for jet fuel returns. It also affects gasoline. Because refineries operate at maximum distillate, we do not build up significant gasoline stocks before the peak season. As demand grows and stocks remain low, food tankers will need to be a channel to fill the global imbalance between supply and demand. ”

The same commodity expert Argus said about gasoline. The lack of spare capacity is alarming at the peak of the summer driving season, ”Argus said on Thursday. “The situation is complicated by the even higher profits of the middle distillate, which have increased the supply of diesel fuel compared to gasoline.”

Inventories designed in the COVID era

Usually rates for crude oil and tanker tariffs tend to be roughly in tandem. When one is superior to the other, it is usually rude. This year, product tankers are far superior to raw tankers; larger tankers are still below break-even.

Both on crude oil tankers and on product tankers, tariffs fell during the COVID era. Oil production far exceeded demand amid blockades. The world’s reserves are filled to the brim with cheap oil and products bought in the trough. Since then, these stocks have been reduced instead of using tankers to import new supplies (because new supplies are much more expensive than oil that is still in storage, bought in a trough).

Due to this practice, stocks were historically low for several months before Russia’s invasion of Ukraine. In November 2021, Alphatanker published a report entitled “Welcome to the Great Compression of Diesel Fuel”, which warned: around the world. “

Then Russia invaded Ukraine. “This event immediately exposed … the risks of serious depletion of stocks,” – said Evercore ISI analyst John Chapel.

Tankers on products against tankers with raw crude

Asked why this has raised crude oil tanker rates much higher than crude oil rates – given that crude crude stocks are also historically low – Chappel said: “Usually the two groups are highly correlated, and usually crude crude oil raw materials surpasses in size. But we are far from normal times.

“Raw tankers are doing really well in the regions directly affected by the Russian invasion of Ukraine – the Black Sea, the Baltic and the Middle Sea – because of higher insurance costs and the risk of entering these markets. But overall oil markets are balancing new longer trade routes with OPEC’s inability to meet quotas, Russia [being] offline and lock in China. The market is better than it probably should be based on these latter factors, but low stocks and bigger ton-miles [voyage distances] offset by some headwinds macro.

“Food tankers benefit from localized shortages of diesel, high profitability of the refinery … and massive trade resources [arbitrages] which allow traders to pay much higher freight costs while earning a ton on the arb. Global stocks are too low and prices are likely to remain high, forcing more trade on unusual trading fields, boosting capacity and lifting this market much earlier and much higher than oil.

“I think that in the end, tankers will catch up if oil supplies can meet the greater demand at refineries. But now this is a unique product story. And talking to my oil analyst, it is difficult to understand how this shortage of diesel fuel will alleviate or strong tanker markets will end, ”Chapel said.

Summary of income

Among the listed shipowners, Clarkson Plato said that “product tankers are sailing as a winning sector today.”

Rates are rising on the “explosion of refining margins,” Clarkson said. He argued that “the productive sector seems ready to win further.”

Since closing on Thursday, shares of Scorpio Tankers and Ardmore Shipping have risen 106% and 114% since the beginning of the year, respectively. Shares of International Seaways, which owns both oil tankers and products, have risen 50% since the beginning of the year.

The listed tanker owners have just reported bigger losses for the first quarter. Rising rates will not be fully felt until the current quarter.

Ardmore Shipping reported a net loss of $ 7 million for the first quarter of 2022 against a net loss of $ 8.5 million in the first quarter of 2021. The adjusted loss of 4 cents per share exceeded consensus expectations of a loss of 8 cents.

Ardmore has 50% of its MR spat days in the second quarter of 2022 at $ 25,500 a day. This is compared to rates of $ 11,145 per day in the first quarter of 2022.

International Seaways reported a net loss of $ 13 million for the first quarter of 2022 compared to a net loss of $ 13.4 million for the same period last year. The adjusted loss of 29 cents per share was slightly better than Wall Street expected for a loss of 30 cents.

The company has 41% of its available MR 2nd quarter 2022 days booked at an average of $ 24,500 per day. That’s up from $ 14,030 a day in the first quarter.

Scorpio Tankers reported a net loss of $ 84.4 million for the 1st quarter of 2022 compared to a net loss of $ 22 million in the first quarter of 2021. The adjusted loss per share of 27 cents was much better than the consensus forecast for a loss of 58 cents.

Scorpio has 42% of the available days of MR 2nd quarter 2022 for $ 30,000 a day. Its MR fleet earned an average of $ 16,305 a day in the first quarter.

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