By Alex Kimani
The oil tanker business is booming as supply struggles to meet up with demand.
- Tanker rates have exploded to multi-year highs following an uptick in demand spurred by the U.S. ban on Russian oil.
- According to Hellenic Shipping News, petroleum tanker rates for routes originating in Europe climbed to record highs in April 2022.
Market experts consider rising inflation and the Ukraine crisis as the two biggest market risks this year. Runaway inflation has been corroding asset values, limiting buying power and eating away at corporate margins, while Russia’s invasion of Ukraine has disrupted key energy and commodity supply chains causing massive price spikes. Consequently, the Dow Jones Transportation Average has slumped 12% since the beginning of the year on fears of waning domestic demand. But the oil tanker business is proving to be a different beast.
After a bleak 18-month period, the tanker market is enjoying a bumper year thanks to a limited supply of fresh tonnage as well as an increase in oil demand.
Pipeline and terminal operator Kinder Morgan (NYSE:KMI) has revealed that day rates for vessels that move oil and refined products between U.S. ports have improved after the United States banned Russian oil and product imports this year. According to KMI, daily chartering rates are moving toward the bottom end of pre-pandemic rates of $60,000 to $65,000. Kinder Morgan, which owns about 16 Jones Act vessels, says it has recorded a “meaningful” uptick in demand spurred by the U.S. ban following Russia’s invasion of Ukraine.
KMI is not the only crude vessel operator that has expressed that sentiment.
Nordic American Tankers (NYSE: NAT) has revealed that spot Suezmax rates have increased significantly this year.
Shipping rates tend to rise during periods of heightened geopolitical tensions. Operators demand higher compensation to send their vessels into dangerous waters, and underwriters bump up the cost to insure ships and their cargo against potential threats, increasing war risk premiums. Sanctions on Russia’s energy and maritime shipping sectors have forced crude oil buyers in Europe to purchase their crude oil imports from other markets. The United States imported 672,000 barrels per day of Russian crude and refined products in 2021, of which 30%, or 199,000 bpd, was crude, while 473,000 bpd was refined products.
According to Allied’s Research Analyst, Mr. Yiannis Vamvakas, demand for crude dropped “massively” in 2020, taking tanker demand down with it in the charter market. Now, “as global markets progressively returned towards normality during the following quarters, demand for oil also improved. However, the rate of this improvement was much slower than what was initially expected.”
Under the current circumstances of a Russian war with Ukraine and Western sanctions toying with global oil and gas markets, it’s not surprising that tanker stocks have outperformed the broader market by a wide margin.
Among crude tanker owners, Kinder Morgan has gained 22.1% in the year-to-date; Tsakos Energy Navigation (NYSE: TNP) has gained 40.2%, Frontline (NYSE: FRO) has advanced 34.6%, Teekay Tankers (NYSE: TNK) is up 79.7%, Euronav (NYSE: EURN) has jumped 47.7%%, International Seaways (NYSE: INSW) has gained 56.5% , Nordic American Tankers is up 5.2% while DHT (NYSE: DHT) has added 13.8%.
European Tanker Markets Booming
But it’s not just American tanker markets that are booming.
According to Hellenic Shipping News, petroleum tanker rates for routes originating in Europe climbed to record highs in April 2022 thanks to geopolitical instability related to Russia’s full-scale invasion of Ukraine as well as rising marine fuel prices, also known as bunker fuel.
Dirty tanker rates for Aframax-sized vessels originating in the Black Sea in southeast Europe more than tripled to $32.10 per metric ton (mt) in April 2022 from $10.11/mt price in January 2022. The tanker rates for routes originating in the Baltic Sea in northern Europe rocketed to $41.38/mt in April 2022, up from $7.50/mt in January 2022. Due to a global shortage of Aframax ships, the dirty tanker rate for the Baltic-UK Continent (UKC) route jumped from $8.53/mt in January 2022 to $41.38/mt in April 2022.
Petroleum tankers are generally classified into two groups: clean tankers and dirty tankers. Clean tankers carry lower-sulfur petroleum products, including refined petroleum products such as motor gasoline, diesel fuel, jet fuel, and naphtha. Dirty tankers mostly carry crude oil, but they can also haul high-sulfur petroleum products such as residual fuel oil.
The high tanker rates in the Black Sea are mainly due to higher insurance risk premiums because the sea borders Ukraine and Russia. The Black Sea also borders Georgia, Turkey, Bulgaria, and Romania. HSN says one cause for the high Aframax rates at Russia’s Baltic Sea port, Primorsk, could be higher demand for the smaller Aframax ships on routes traveling from Russian ports to China. Normally, Very Large Crude Carriers (VLCCs) are used to transport Russia’s Ural crude oil to China.