A strong year ahead for crude tankers
? Tanker freight rates rose substantially in the two weeks ended 8 Apr, as the
Russia-Ukraine war increased shipping distances and tonne-mile demand.
? Reiterate Add with higher SOP-based TP of RM8.36, as we increase the endCY22F secondhand crude oil tanker price assumptions by another 10%.
? The release of strategic reserves will be a key catalyst, as well as potentially
higher output from Saudi Arabia and the UAE and a US-Iran sanctions deal.
Higher tonne-miles as Europe imports oil from further away
Aframax and suezmax rates spiked in late-Feb 2022 as a consequence of the Russia-Ukraine war, particularly from Russian ports at Novorossisyk (Black Sea) and Primorsk
(Baltic Sea), as Russian exporters lured reluctant tanker operators to load in Russia (see
our 8 Mar note). Since then, tanker rate increases have spread to other route regions and
also benefitted VLCCs. As Europe sought to avoid Russian oil, it purchased from the US
and Latin America, from the Middle East, from West Africa, from the Mediterranean, as
well as from the North Sea. The positive tonne-mile effects of the above have so far more
than offset the decline in Russian oil exports, which the International Energy Agency (IEA)
expects to fall by 1.5 mbpd in Apr with the fall widening to 3 mbpd by May. Nevertheless,
the decline has been mitigated by higher Indian imports of Russian crude (India has sought
at least 16m bbl of Russian oil since 24 Feb 2022, similar to imports in all of 2021, according
to Reuters), and higher Russian exports from the Far East port of Kozmino to Chinese
teapot refineries (3.3m tonnes for May vs. 3.1m tonnes for Apr).
Release of US strategic reserves to benefit MISC’s US-based afras
IEA members recently agreed to release 240m bbl of oil reserves over six months from
May to Oct (of which the US will release 180m bbl), or 1.3 mbpd. The released US barrels
may be used domestically, as well as exported, according to shipbroker Gibsons. Since
US oil is primarily exported to Europe on aframaxes, MISC will be in the direct path of this
tailwind, as most of its aframaxes are based in the US Gulf, and at least 40% are trading
spot. MISC may also benefit from higher VLCC and suezmax rates.
Additional catalysts: higher OPEC output, Iran sanctions relief
Saudi Arabia and the UAE, holding 74% of the spare capacity of the 10 OPEC members
that are subject to production quotas, have not stepped up output to compensate for the
loss of Russian exports or to make up for the failure of their OPEC and non-OPEC allies
to produce according to plan. OPEC-10 raised production by only 0.12 mbpd in Mar vs. the
plan to increase output by 0.25 mbpd, while its non-OPEC allies’ production fell by 0.07
mbpd in Mar vs. an intended increase of 0.15 mbpd. Tanker freight rates may see a boost
in the future if Saudi Arabia and the UAE take steps to specially raise production, and if the
US and Iran come to an accommodation on sanctions relief, which may result in an Iranian
export lift of 1.4 mbpd. Downside risks: slowdown in demand growth due to the Shanghai
Covid-19 lockdown, higher-than-expected drop in Russian oil exports.