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Apr 9 • 16 tweets • 5 min read
1/ #Tankers are the biggest beneficiary of changing trade patterns due to Russian sanctions. PERIOD.

A look into why tanker rates are surging this week and why this is just the beginning.

A 🧵...
2/ The picture is becoming even clearer that Russian oil which used to go via pipeline and short sea to Europe will go all the way to China and **BACK** instead.

bloomberg.com/news/articles/…
3/ **BACK** from China? YES. The West is structurally short on refining capacity and the deficit is getting larger as Russian refining capacity becomes shut in and European refiners struggle to source the slate needed to run at full capacity. reuters.com/business/energ…
4/ While North American Refiners run full bore at near record margins to offset some of the deficit, Chinese refiners remain underutilized: spglobal.com/commodityinsig…
5/ With a diesel crisis developing in Europe and North America insufficient to make up the difference, it is only a matter of time before Chinese refineries increase runs to export products back to the West. oilprice.com/Latest-Energy-…
6/ Trade patterns are far more complex and nuanced than the marginal barrel of Chinese refined product shipped directly to Europe.

But if the marginal spare refining capacity is in China and refining capacity is lost in Europe, the net effect will be more products E to W.
7/ How to even begin to quantify this?

Even before factoring Russian trade disruption I estimated around 100 extra VLCCs were needed just to accommodate OPEC production coming back through year end:
8/ In 2021 Europe imported 2.2M b/d of crude and 1.2M b/d of products from Russia. If this all must ship to China and at least part of the way back instead this is another 100+ VLCCs of capacity needed. Mind you, this is into a fleet of 860.
9/ For perspective, when the US sanctioned the COSCO tanker fleet totaling ~70 VLCC equivalents of capacity in Sept 2019, it quickly sent VLCC rates from $30K to nearly $300k per day.
10/ I won't be as bold as to say VLCC rates are going back to $300k but I am watching the tape and its telling me that ship availability is already tight in the smaller sizes and rates are going MUCH HIGHER as SPR and OPEC volumes increase.
11/ And although #tanker equities are already at or near 52wk highs, they are nowhere near pricing today's spot rates let alone where rates appear to be going.

At today's spot rates, Aframax and Suezmax operators like $TNK and $TNP make their entire market caps in FCF in a year.
12/ Dislocations in tanker rates between sizes, geography, and product traded (clean vs dirty) generally only exist for short periods as high enough rates incentivize tankers to switch trades. ALL benefit from increased aggregate trade.

Clean/Dirty correlation over time:
13/ If indeed a shortage of aggregate tanker capacity develops and rates stabilize at very high levels, rates across sizes/trades will trend toward a uniform $/ton benefitting the biggest ships most.
14/ Although a pure play VLCC operator like $DHT is likely to have the highest margins in an extremely high rate environment, it doesn't necessarily mean it will be the the best performing stock.
15/ In a rapid change of paradigm from low rates to very high rates, the companies with the highest financial leverage (**and risk**) like $TNP and those that aggressively repurchase shares below intrinsic are likely to have the greatest share price appreciation.
16/ Here is the list of US listed oil/product tanker cos from largest to smallest by gross asset value: $FRO $EURN $STNG $TNP $INSW $TRMD $DHT $TNK $NAT $ASC

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More from @AllVentured

AllThingsVentured Profile picture
Apr 3
1/ After the initial spike on the news of the Ukraine invasion tanker rates initially retraced due to lack of employment while Russian exporters sorted out details on who would buy the oil.

With buyers found, aframax and suezmax rates are moving higher again on tight ship supply
2/ Even the massively oversupplied VLCC fleet has seen an uptick in rates (to slightly less loss-making levels) on the burgeoning tightness in the market.

But until this excess capacity in VLCC is removed from the market rates for smaller classes are likely to remain capped.
3/ So the question is how quickly is supply coming back to the market and when can we expect this VLCC excess capacity to be absorbed?

I will attempt to put the monthly 400kb/d OPEC capacity increase schedule into context as it relates to seaborne volumes:
Read 10 tweets
AllThingsVentured Profile picture
Apr 2
1/ Simandou back on track with a new firm deadline to start shipping 3/31/25.

At 100MMt/yr it will be second only to Vale's S11D mine in its impact to seaborne ton miles.

There are not enough ships nor enough shipbuilding capacity through 2025 to accommodate this start date.
2/ Lets do some back of the envelope math:

Capesize round trip from Guinea to China around 110 days at 11kt = 3.3 trips per year.

To ship 100MM tons this distance you need an additional ~145 Newcastlemax ships. This is roughly equivalent to the ENTIRE orderbook today.
3/ But todays orderbook will be barely sufficient to keep up with the new normal of earlier demolitions let alone accommodate the massive growth coming from Simandou:
Read 6 tweets
AllThingsVentured Profile picture
Mar 13
1/ A reply to Alex Turnbull @alexbhturnbull on his Reply to Zoltan Pozsar.

Zoltan is spot on with his high ocean freight thesis. Alex's rebuttal that commodities will trade overland instead is a nice thought but it doesn't actually work that way.
2/ Zoltan recently published a piece titled "Bretton Woods III" hypothesizing among other things that if Russian commodities go to China instead of the West it would cause very high ocean freight rates.
3/ @alexbhturnbull's Substack reply to Zoltan:

"One of the big losers in all of this is likely to be freight shipping: as China is likely to trade more with Russia the appeal of overland transport is going to be significant here both to avoid detection and ensure capacity."
Read 13 tweets
AllThingsVentured Profile picture
Mar 1
1/ What do you get when you combine high fuel costs, impending emissions limitations starting in 2023, and record high scrap steel prices?

Large ships sold for scrap at much younger ages than usual despite an optimistic outlook on earnings.

Last week's demo sales per Advanced:
2/ It is no surprises to see large 18 and 19 year old tankers sold for scrap last week considering the weak rate environment but it is a bit of a surprise to see young capesize bulk vessels scrapped with rate futures expecting highly profitable rates in the balance of 2022:
3/ But I can't argue with the decision to sell an asset nearing the end of its life for more than double the scrap value that similar vessels fetched only 18 months ago.

That is nearly $15m of cash for each cape sold last week which can now be redeployed into a younger vessel.
Read 9 tweets
AllThingsVentured Profile picture
Feb 28
1/ Will #RussianSanctions be a boon for tankers? Surging spot rates and tanker equities suggest yes.

If Europe chooses to buy elsewhere and a meaningful portion of crude from the Black Sea and Baltic goes to Asia instead, it will add huge ton miles.
2/ This changes things. Whereas tankers were looking like they wouldn't see profitable rates until Q3/4 at the earliest and the likelihood of very high rates was low, now it is entirely possible that tanker companies make huge profits in 2022.
3/ I have been an outspoken tanker bear over the past 18 months with a bullish outlook in the longer term.

Considering recent events, I am no longer on the sidelines. Many tanker equities already look expensive but I'm buying the bargains.
Read 5 tweets
AllThingsVentured Profile picture
Jan 16
1/ Early indications point to #HungaTonga eruption being comparable in size to the largest eruption in the last century: Mt. Pinatubo in Philippines.

If this is in fact the case, it is likely to have major implications for climate, weather, and markets in coming years.

A 🧵...
2/ Leaning on data collected after the Pinatubo eruption in 1991 as the closest modern proxy, we can make some make some reasonable predictions on what impact #HungaTonga may have:

The huge amount of reflective ash released from Pinatubo caused significant global cooling:
3/ This reflective ash reduced the amount of sunlight reaching the earth's surface by as much as 10% immediately after eruption and continued to reduce sunlight for 3 years afterward
Read 11 tweets

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