VERY large crude carrier rates are showing signs of life, giving hope for a “better late than never” seasonal rally. Tanker stocks are ticking back upwards after a precipitous slide, yet the outlook remains highly uncertain for the coming winter.

“While there are several pockets of geographic strength and crude is a little better than refined products, generally there are still no clear signs pointing to a seasonal rally,” cautioned Stifel analyst Ben Nolan in a new client note.

Brokerage BRS warned on Monday, “It appears that few [market factors] can be relied upon to inject extra tanker demand into the markets by the end of 2024. This suggests that this winter could become a winter of discontent for tanker owners across the globe.”

VLCC rate bounce offers glimmers of hope

Other analysts are more optimistic, highlighting the recent bounce in VLCC rates.

According to Clarksons data, spot rates for VLCCs averaged $39,600 per day on Friday, up 19% week on week, albeit flat month on month and still down 43% year on year. The Baltic Exchange weighted-average VLCC index showed a further 3% gain on Monday versus Friday.

“Owners are expected to push rates higher as December loading cargoes enter the market this week,” said Clarksons Securities analyst Frode Mørkedal in a client note on Monday.

VLCC utilisation in the fourth quarter to date is around 88%, Mørkedal said, roughly the same as in 3Q24 and down 2% from 4Q23, but he noted that the International Energy Agency expects refinery runs to rise by 900,000 barrels per day in December versus November, while inefficiencies and longer wait times because of winter weather “may help to tighten capacity and support rates even further”.

According to Jefferies analyst Omar Nokta, “VLCC spot activity is expected to be busy this week as the start of the December export fixture programme begins in the Middle East.

“While rates across all tanker segments have lagged in comparison to their performance at this time last year, there are promising signals pointing to tighter vessel availability in the near term. According to vessel-tracking data, last week was the busiest for crude loadings out of both the Middle East and US Gulf markets since April.

“If the current pace of activity continues, it would lead to a more limited tanker supply balance and firmer spot rate potential,” said Nokta.

Relative weakness across both crude and product segments

Spot-rate performance across all tanker segment highlights the extent of market weakness in the runup to the typically stronger winter season.

On the crude tanker side, VLCC spot rates have come off their lows yet suezmax and aframax rates have continued to decline. Clarksons put average suezmax spot rates at $32,100 per day, down 9% week on week and 42% year on year. Aframaxes are performing the worst. At $24,900 per day, aframax rates are down 10% week on week and 55% year on year.

On the product tanker side, medium-range tankers are performing best by historical standards. Current MR spot rates are $21,100 per day, up 6% over the past week and 19% over the past month. Nevertheless, they are still down 44% from this time last year.

Rates for long range 1 and long range 2 product tankers have held their ground in the past week. But LR2 spot rates — currently $21,900 per day — are down 20% since a month ago and 45% since a year ago. LR1 rates, at $17,400 per day, are down 17% month on month and 52% year on year.

“It is not hard to see why sentiment is currently so bearish,” said BRS. “Freight rates and earnings, especially for clean tankers, are currently plumbing some of their lowest levels since Russia’s invasion of Ukraine sparked a significant redrawing of oil flows and an associated injection of tonne-miles in 2022.”

Tanker stocks still heavily underperforming broader market

Nolan — who cut ratings on all the tanker stocks he covers to “hold” on October 22 — believes “fundamental tanker demand… is probably only growing in line with or below supply growth, meaning we expect tanker rates to be lower than they have in the past several years”.

“In a situation where rate momentum is negative or there is the perception of rate risk, valuation metrics like NAV [net asset value] do almost nothing to support share prices. This downside has been playing out in equities as the lack of a seasonal rally thus far has been compounded by hopes of easing geopolitical disruptions post-election.”

On the latter point, Nolan said, “Should there be a reversal or even partial easing of either the Russian sanctions or Red Sea closure, tonne-mile demand would shrink, which would be bad for tankers.”

If there is any positive for these equities, it is that some tanker stocks may have fallen too far.

“Even at these lower prices, we lack conviction in the medium term for tanker equities, [but] it does appear that a number of the names are oversold,” said Nolan. Consequently, there could be upside for some tanker stocks in the near term “if there should be a late season [rate] rally”.

Tanker stocks had a good day on Monday, up by low to mid-single digits. Frontline rose 5%. However, the damage has been done since the collapse in pricing that began in early October. Tanker stocks are now heavily underperforming the broader US stock market, with product tanker stocks faring notably worse than crude tanker stocks.

A measure of the broader market, the SPDR exchange-traded fund that tracks the S&P 500, is up 3% since October 1. In contrast, the adjusted closing price of crude tanker owner DHT is down 4% and Frontline is down 13%. Mixed-fleet owner International Seaways (INSW) is down 19%, while the share price of mid-sized crude tanker owner Teekay Tankers has plunged 25% since October 1.

The VLCC rate rise has helped DHT and Frontline reverse some of their share losses in recent trading sessions. VLCC owner stocks are up more in recent days than equities of midsized crude-tanker owners and product-tanker owners.

On the product-tanker front, shares of Hafnia are down 21% versus the adjusted close on October 1, with Scorpio Tankers down 23%, Torm down 28% and Ardmore sinking 34%. 

Year to date, some crude tanker stocks are still in the black, albeit well below SPDR’s gains. In May and June, all tanker stocks were significantly outperforming the broader market. That upside is long gone.

Since January 2, the adjusted close of DHT is up 15% and Frontline is up 7%. INSW is down 2% and Teekay is down 12%. Among product tanker owners, Scorpio is down 11% year to date, Ardmore 12%, Torm 15% and Hafnia 16%.

Meanwhile, the most passive way to invest in stocks, just buying SPDR, has proven a much better bet. It’s up 27% year to date.