ATURAL GAS | OIL | SHIPPING 17 Sep 2020 | 15:30 UTC LONDON
INTERVIEW: Oil crisis has created new market dynamics, says Euronav CEO
Author Paul Hickin
Editor Alisdair Bowles
Commodity Natural Gas, Oil, Shipping
Topic COVID 19: Coronavirus Outbreak, Industry Views
Floating storage boom provided three good quarters
COVID-19 has upended flows in crude tanker space
Upbeat on US shale rebound, China's demand strength
10 million b/d in lost demand needs to return to bolster freight rates
LONDON — The coronavirus pandemic has led to a shift in the tanker sector's supply-and-demand dynamics, with the floating storage bonanza that caused freight rates to spike higher set to provide three bumper quarters in 2020, according to Hugo De Stoop, CEO of Euronav, one of the largest global tanker operators.
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Register Now De Stoop said in an interview with S&P Global Platts on Sept. 7 the current "oil crisis" has affected many people in many directions in terms of investment capacity, with an intensification of temporary storage used as a buffer forming a key part of the landscape.
"We have seen the traders become even more active than they were before, so it seems that we are getting further away from traditional oil and production, transporting, delivering to the refinery and then sending it to the consumer market. It seems that there is more trade, more sophisticated movement, more deviation of the ships," he said.
He gave the example of a VLCC en route to the US Gulf Coast with cargo and then doing a U-turn and arriving in China, noting that he "couldn't remember ever seeing that and now, in the past six months, it has occurred on three of our own vessels."
De Stoop believes the global tanker market this year will have three good quarters followed by a bad Q4, highlighting how "spectacular" the April-June period was thanks to limits on land storage that created a frenzy to store crude at sea and pushed freight rates to record highs. VLCC WAF-East rates were languishing at one-year lows of $12.97/mt by the end of June, a fall of over 80% from early-April, according to Platts data, but a number of longer term deals have buoyed the tanker industry for longer.
He warned of the uncertainty ahead and said the key to managing volatility is staying financially prudent during the good times. Euronav -- which according to ISI Evercore's analyst Jonathan Chappell has many strengths including "one of the best balance sheets; strong corporate governance; industry leading operating leverage; biggest market cap; liquid trading shares" -- is still at the mercy of the storage destocking.
De Stoop noted that global oil consumption is about 10 million b/d lower than pre-COVID but, at the same time, there is almost same amount of ships and many of those used for jobs other than transporting -- namely storage -- are starting to come back to the market.
"We see an imbalance between the capacity to transport oil and the number of cargoes, so we are hitting relatively low levels in freight rates. And we don't see this situation improving before we get back the consumption of oil pre-COVID," he said. The Euronav boss believes China's oil demand growth is "inevitable" and US shale will adapt and bounce back like it has in the past because it is a "very flexible" type of production, but maintains there is just too much uncertainty in the near term.
More charterers are looking for VLCCs again for short-term time charter, as freight is dipping to a record low while the crude oil market's contango structure widens, according to shipping sources.
"The steep decline in tanker rates over the past three months to new lows for the year increased the potential for floating storage. Spot VLCC rates from the [Middle East] to China plunged to w25 last week," Platts Analytics said in a report Sept. 10. That freight rate is equivalent to vessel earnings of just $7,000/day, well below cash breakeven levels for a VLCC.
De Stoop also said there are lessons to be learned from the restrictions to crews during COVID-19. He suggested that shipping may need to be more open if it doesn't want be the invisible child, with the world often forgetting that its responsible for 90% of global trade.
"When we need the world to cooperate, when we need the world to pay attention to shipping, of course everybody is ignoring us simply because they don't even know we exist," he said. The crisis of seafarers unable to do their jobs properly is likely to be "pretty low on their [governments] to-do list". We need to "rebrand shipping as a noble good," he added.