THE MOOD was predictably ebullient and bemused as tanker executives and analysts gathered in Manhattan on Wednesday at the 18th Annual Capital Link New York Maritime Forum.

Spot rates are off the charts, with yet another record confirmed by the Tankers International pool this week: the 22-year-old very large crude carrier ST1 (IMO: 9256999) was fully fixed for a 12-day voyage loading inside Hormuz at $1.9m per day.

Ageing VLCCs used to go to the shadow fleet* versus the scrapyards; now they’re running the Hormuz gauntlet. The lump-sum rate on a single high-risk Hormuz voyage is higher than the VLCC scrap value.

“We are going from record to record,” said TEN chief executive Nikolas Tsakos.

According to Jorgen Lian, shipping analyst at DNB Carnegie, “There’s been a lot of theoretical talk about VLCC earnings potential, but the reality is that most people right now have the opportunity to fix at levels that are pretty close to the $1m-per-day mark on a round-voyage basis.

“That’s just a fairy tale number. We’ve never seen it before. Unfortunately, this is going to ruin our charts for the foreseeable future. This is a volatile industry and you can’t see the swings in the historical numbers anymore.”

VLCC spot rates for Gulf of Oman (GOO) loadings were assessed by the Baltic Exchange at $823,213 per day on Thursday. There are plenty of takers for GOO loadings, including vessels of public companies such as DHT and Frontline, according to Tankers International data.

“I haven’t been this optimistic since they got the vaccine for Covid,” proclaimed Scorpio Tankers president Robert Bugbee, who said he felt very differently only a few weeks ago.

“I had been very concerned until two weeks ago that we were at high risk of a world economic meltdown and a real crisis for the demand side. If you’d spoken to me three weeks ago, we were very concerned as a company about building up cash and deleveraging. We were very, very afraid of: what’s the end in this?

“But this last two weeks has been a real transition,” said Bugbee.

“The combination of the US Navy and the Saudi, Kuwaiti and UAE willpower to get crude out of the Middle East Gulf, and the repair of the East-West Pipeline, has had an immediate result. You don’t even need peace with Iran — you just need the oil to come out.

“As soon as more crude started to get out of the Gulf, the Asian refineries said, ‘Fine, we’re willing to release more products into the market’, and the products rates have just gone straight up.”

Some tanker executives at the Capital Link forum maintained that the tanker boom could last for an extended period, albeit not at current peak levels.

Assuming MEG countries continue to get their crude through Hormuz despite ongoing Iranian attacks, Bugbee said that “companies estimating what they’re going to be earning in the fourth quarter, or the whole of next year, or the next two years after that, would have to raise their estimates, because you’ve taken a big risk off the table”.

Harrys Kosmatos, chief financial officer of TEN, said: “Considering the new trades and new markets and that oil stocks need to be replenished, we believe we have at least two to three years of runway of a good market that the orderbook does not have the power to throw off course.”

Higher crude access for refiners

The cargo volume exiting Hormuz last week was the highest since before of the crisis, said Jacob Meldgaard, chief executive of Torm.

“Refiners, for the past six months or so, have been accustomed to getting relatively slim deliveries and having to take from stockpiles. Clearly, they will be getting more volumes they can turn into final products, which we see as an immediate catalyst.

“I think what will happen is that refiners that have any spare capacity will bid for the crude that is available, which is becoming more available as we speak,” Meldgaard added.

According to Gernot Ruppelt, chief executive of Ardmore Shipping, “There is a lot of noise in the market, so let’s just focus on the key fact. The key fact is that refining margins today are twice the level they were before the Iran situation kicked off, and before the Iran situation, refining margins were twice the level they’d been in the early part of this decade.

“That is significant because freight has become such a small component of refining.”

According to Tsakos, “Two million barrels [on a VLCC] — that’s between $200m and $250m of cargo. Even at $200,000 per day, the oil companies can afford to pay it. They do not mind paying up for transportation” as long as they’re all paying similar rates.”

Winter is coming

One reason freight rates are so strong is that charterers are worried about vessel availability.

VLCCs tied up in ship-to-ship transfer operations in the GOO and off India are reducing effective global capacity. LR2 product tankers are also increasingly participating in the Hormuz shuttle-GOO STS system, according to Vortexa data.

VLCC voyages from Atlantic loading ports to the Pacific are simultaneously constricting capacity of tankers in ballast and available to load.

“Anybody that is structurally short freight — whether they’re refining oil, trading oil or buying oil — is already significantly exposed to spot rates, and access to tonnage has become a significant problem,” said Ruppelt. “For anybody that has to move oil, the key risks are spot rates and pure access to tonnage.”

When tonnage dries up, “then all of a sudden, what you pay for a ship becomes an afterthought to moving your oil”, he said.

Bugbee said, “We’re going to see the one-year rate, the three-year rate, and the five-year rate all move upwards now. Charterers know that oil and products have got to ship because inventories are so low — and we have winter ahead.”

According to Ruppelt, “All this is before we factor in the structural bottlenecks and structural dynamics of the winter market, things like weather in the North Atlantic, end-of-year stock clearing and trading, weather [fog] in the Houston Ship Channel, and the multitude of additional logistical bottlenecks that occur at this time of the year.

“You add that on top of the current tightness and there could be a further shift in the dynamic.”

The diesel crunch

Financial market players are obsessed with crude prices, but the real measure for the world economy is the price of refined products, particularly diesel.

Today’s historically high crack spread, the spread between crude and products pricing, is what has allowed VLCC rates to reach “fairy tale” levels. In past tanker upcycles, the crack spread enforced a much lower freight ceiling.

But the skyrocketing cost of products is a double-edged sword for tanker shipping. The higher diesel ascends, the more risk of demand destruction and resource hoarding.

Executives at the Capital Link forum repeatedly pointed to rebounding products loadings in Asia made possible by additional crude from the MEG. They highlighted rising products flows from China.

However, the day after the event, Reuters reported that China had temporarily suspended exports of refined products to destinations beyond Hong Kong and Macau.

There is also continued talk of US diesel export restrictions. The consensus is that this would be negative for product tanker demand, although Ruppelt begged to differ.

“The rule of thumb for US Gulf [products] is very simple: a third gets exported, a third gets piped up to places like New York or shipped [coastwise] to places in the US, and a third is consumed in the US Gulf.

“You have a well-functioning, efficient market process to make sure that whatever slate a refinery produces — which is well-matched to its markets and the feedstock of crude it’s taking in — is finding a way to maximise profits.

“If you take away that [export] piece, then all of a sudden, you inhibit the profitability of the very players you need to increase supply. You will see long overdue refinery maintenance kick off. You will see lower supply of gasoline and jet fuel in the US.

“You will see arbitrage movements open that we haven’t even thought of. Just when we thought the world had found a solution, with the US being the swing producer of diesel and refined products, that would all get tossed out.

“It would be mayhem,” predicted Ruppelt.

“And typically, during such times, purely flexible assets that are trading spot, like ours, with the ability to arbitrage those incredible forces in the products market, are likely to benefit from that.”