Is the shift in global crude flows caused by the Ukraine-Russia conflict a passing fad or the beginning of a new era?
Many market observers and investors thought it would be short-lived initially. It now appears to be something to look forward to in the medium future. More Russian crude will likely continue to flow to India and China for an extended length of time, while more Atlantic Basin and the Middle East crude will flow to Europe to replace Russian barrels.
“Oil supply chain interruptions caused by Russia’s invasion of Ukraine are proving to be long-lasting, with much longer average journeys,” stated Steward Andrade, CFO of Teekay Tankers (NYSE: TNK), during the company’s quarterly conference call on Thursday. “These changes in trade patterns are expected to be long-lasting.”
Euronav (NYSE: EURN) executives made the same argument on their quarterly call on Thursday. “This isn’t an event that happens over a few weeks,” says Brian Gallagher, Euronav’s head of investor relations. The structural alteration has a long lifespan.”
This is only the beginning.
The EU prohibition on crude oil and petroleum product imports does not go into force until December 5 for seaborne shipments and February 5 for pipeline imports.
Currently, Europe imports substantial amounts of Russian crude. Volumes were roughly 4 million barrels per day (b/d) prior to the invasion. Various estimates place the current decline at 700,000 to 1 million b/d. Despite the fact that the changeover is just one-quarter complete, tanker consequences are already severe.
“We are simply seeing the beginning of a long-tail tale,” said Euronav CEO Hugo De Stoop.
Advantages for smaller and medium tankers
Trade changes caused by the war have primarily impacted smaller tankers known as Aframaxes (with a capacity of 750,000 barrels) and midsize Suezmaxes (1 million barrels). Larger tankers, designated as very large crude carriers (VLCCs), with capacities of 2 million barrels, are too huge to dock at Russian ports.
“Short-haul exports of Russian crude oil to Europe have declined by approximately 700,000 b/d compared to pre-invasion levels,” Andrade explained, “with Russian crude oil increasingly being diverted to destinations east of Suez, mainly India and China.”
“Short-haul Russian barrels must be replaced by imports from other regions, most notably the United States Gulf, Latin America, West Africa, and the Middle East.” Because of the load and discharge zones involved, these adjustments largely benefit Aframax and Suezmax ships.”
“When oil imported into Europe used to arrive in five days from the Baltic, it now arrives in roughly 20 days from the Middle East on a Suezmax or in approximately 20 days from the United States Gulf on an Aframax, which is obviously beneficial for ton-mile demand.”
Tanker demand is quantified in ton-miles, which are volume times distance. The greater the average distance, the more tankers are required to transport the same volume.
“When China imports oil from the Baltic on Aframaxes, as we’ve seen recently,” said Andrade, “it’s another example of rising ton-mile demand owing to changing trade patterns.”
More VLCC ship-to-ship transfers?
Euronav anticipates that the conflict effect will favor VLCCs as well, for two reasons: ship-to-ship transfers in the Russia-to-Asia trade and the close interconnectedness between the Suezmax and VLCC markets.
“Obviously, the most efficient way to carry crude oil over vast distances is on a VLCC.” “Ideally, they would perform transshipment,” De Stoop added, referring to Aframaxes or Suezmaxes loading cargo in Russia and transferring it to VLCCs.
“We’ve already seen a couple of those, mostly off the coast of Africa.” We’ve also seen goods being dumped in Libya and Egypt for brief periods before being hoisted again aboard larger ships. The industry that can [carry Russian oil] is attempting to find the most efficient means to transport that oil to the Far East.”
Connection Suezmax-VLCC
Meanwhile, if Suezmax rates exceed VLCC rates, oil shippers typically combine two Suezmax cargoes into a single lot and use a VLCC instead.
“There are a number of markets where two Suezmax cargoes can go into one VLCC, so there’s this push-pull effect,” De Stoop explained. “When the Suezmax market is performing well and seeing more cargoes, it has a natural knock-on effect on the VLCC market.” Those two markets are inextricably linked.
“When we speak to our clients’ chartering desks, it’s usually the same folks [booking Suezmaxes and VLCCs], and they compare the prices.” We’ve seen a lot of cargoes that were shown to our Suezmax desk and then vanished and reappeared in the [VLCC] pool in the previous two or three weeks. Two cargoes were being blended to be transported by a VLCC.
“Normally, the VLCC segment does all of the hard liftings for the other segments.” Because the disruption is coming from Russia, which is not a VLCC market, the pushing is coming from the lower ships this time.
“The Aframaxes are pushing the Suezmaxes, who are pushing the VLCCs.” Simply because, when comparing Suezmax rates to VLCC rates, VLCCs are significantly less expensive. [Suezmax tariffs are currently 30% higher, according to Clarksons.]
“And that’s exactly what we’ve witnessed in recent weeks.” That is the primary reason why we believe the VLCC market improved following the Suezmax.”
A roundup of tanker earnings
Although the VLCC market is improving, it was severely sluggish in the second and early third quarters.
Euronav, which owns VLCCs and Suezmaxes, reported a $4.9 million net loss in Q2 2022, compared to an $89.7 million net loss in Q2 2021. Its adjusted loss of 12 cents per share fell just short of the consensus estimate of 11 cents.
In Q2 2022, Euronav’s VLCCs earned an average of $17,000 per day. So far in the third quarter, the business has booked 47 percent of available VLCC days at a far lower rate: $12,700 per day. De Stoop ascribed this to longer-distance journeys booked during a period of low rates, as well as the use of VLCCs on lower-earning repositioning voyages.
Teekay Tankers, which owns a fleet of Suezmaxes, Aframaxes, and product tankers, recorded a net income of $28.5 million for the second quarter of 2022, compared to a net loss of $129.1 million in the second quarter of 2021. The adjusted earnings per share of 76 cents above the consensus estimate of 61 cents.
Teekay’s spot-trading Suezmaxes earned $25,310 per day in the second quarter of 2022. So far in the third quarter, 43 percent of the company’s available Suezmax days have been booked at an even higher average rate: $29,600 per day.
