All eyes in the tanker market are fixed on the emergency Opec+ meeting scheduled on Thursday, which will set the tone for requirements for floating storage.
Faced with a collapse in oil consumption amid the coronavirus crisis, Opec, Russia and nine other producers are to decide on whether there would be crude production cut.
According to media reports, total reduction could amount to between 10m barrels per day (bpd) and 15m bpd, with participation from the US, Canada and Norway.
Such a development would reduce incentives for oil firms to store crude at sea for later sales, also known as contango play, analysts said.
“Demand for floating storage had initially been coming from traders seeking to capture an arbitrage in the forward oil curve’s contango but that has since shifted to charterers seeking tonnage for logistical purposes to store excess crude oil and refined products,” Clarksons Platou Securities said.
“Activity levels however have slowed down materially following the news of an OPEC+ meeting and we are likely to see limited activity for the next few days.”
However, even if major oil producers across the globe indeed join heads, not all of the floating storage demand will dissipate.
The International Energy Agency’s executive director Fatih Birol told Reuters that the Covid-19 outbreak could wipe out as much as a quarter of global oil consumption.
According to Birol, oil inventories would still rise by 15m bpd in the second quarter even with a supply cut of 10m bpd.
Prices could fall again
Brent prices fell 7% in early Asia trading but have since recovered after the delay to the OPEC+ meeting.
Fearnley Securities said Saudi selling prices have also been delayed and will now depend on the outcome of the meeting on Thursday.
If there is no deal, May prices are likely to be reduced again.
US president Donald Trump’s meeting with US oil companies on Friday ended without any signs of production cuts.
"Interestingly, Trump also noted that he could use tariffs to protect US producers," Fearnley said.
Fearnley still sees a slim possibility that there will be a deal to cut 10m bpd-plus of production, which would obviously be a major blow to the tanker market.
"A solution with a smaller effective cut, where for example the baseline is inflated April numbers, appears more realistic," analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said.
"There is also a fair chance that the discussions break down altogether, with instead gradual disappearance of volumes that is not profitable in a $20 per barrel price environment."
The two latter alternatives should be sufficient to keep tanker rates at good levels, considering that floating storage would be a necessary tool to absorb unwanted barrels in the coming months, the analysts added.
Impossible to predict impact on shares
"It has never been more difficult (read impossible) to predict tanker equities, with pretty much a -50% to +100% range depending on the scenarios," they said.
Fearnley is holding its buy recommendation on crude tanker owners as it believes a cut of less than 5m bpd, a gradual decline or no agreement are the more likely outcomes.
“The current crude oversupply will likely persist due to the unprecedented demand loss from Covid-19,” Braemar ACM said in a research note.
In early March, the Opec+ failed to reach a 1.5m-bpd supply cut deal, leading to a price war among crude producers.
Consequently, Saudi Arabia boosted oil exports to 9.64m bpd in the final week of March, compared with 7m bpd in the previous 24 days, according to Kpler.
National oil firm Saudi Aramco is now reportedly delaying the announcement of its Mat crude prices to 10 April, a rare move underscoring that the kingdom is serious about the upcoming talks.
While high oil exports have supported tanker earnings in general, the momentum begins to slow down towards the end of last week after the Opec+ meeting news broker.
According to Clarksons Platou, global average VLCC earnings were $197,700 per day as of Monday morning, down from $226,200 per day on Friday.
“Tanker equities began the [previous] week with gains of 15-20%, approaching positive territory for the year, but finished with losses of around 15%,” the brokerage said.
The four most active stocks – namely Frontline, Euronav, SHT Holdings and Scorpio Tankers – saw $1.35bn worth of shares traded last week, compared with the weekly average of $600m in the first quarter.
