Dirty tanker rate relief set to come in Q4, but full recovery elusive: Teekay
After facing historically low dirty tanker freight in the third quarter, Teekay Tankers expects that Q4 will continue to bring a long-awaited rate rally to the market.
But the impact of firming fundamentals will be subdued as global oil demand recovery remains volatile amid a global pandemic environment and as skyrocketing oil prices leave shipowner earnings at a disadvantage.
“I think it will be a stronger quarter definitely compared with Q3,” Teekay Tankers CEO Kevin MacKay said in the company’s Q3 earnings call Nov. 4. “Will it return to levels we saw in the early part of 2020? I don’t think we are going get those kind of highs, not when we have 4.6 million b/d of crude still not being transported around the world.”
Mackay pointed to the deficit in global oil production, which has left tankers slow to rebound back to pre-pandemic levels. Teekay believes that a release of 400,000 b/d by OPEC+ into December, as confirmed in their Nov. 4 members meeting, will maintain a steadier pace of production increases, keeping tanker demand from rebounding back to levels seen in early 2020. There is recovery and improvement being seen, however, from earlier on in the year heading into the short to medium term as OPEC+ and non-OPEC+ production levels are slowly returning to the market.
Global inventory levels also play a key role in rate recovery, however an unpredictable one. Teekay expects, with crude inventories currently well below the five-year average, there will be a push to restore those levels in the coming months, employing ships to move crude into low-inventory regions.
Teekay is eyeing as a key factor in the freight push ever-growing global crude oil demand, which is expected to rise anywhere from 500,000 b/d to 1 million b/d through March 2022 if major demand centers avoid an unpredictable lockdown environment, according to the International Energy Agency. Overall, demand for oil is predicted to grow 4.7 million b/d in 2022, after growing 1.85 million b/d in 2021, according to S&P Global Platts Analytics.
An uptick in tanker utilization on the back of an upsurge in crude barrels moving on the water has been somewhat overshadowed in shipowners’ minds, however, as an increased demand environment has boosted bunker prices to levels that stifle voyage earnings.
Bunker prices out of the region are currently at levels not seen since before the global pandemic, with Platts assessing Houston delivered 0.5% sulfur fuel oil at $600/mt Nov. 4, the highest level since Jan. 10, 2020. Current prices are up 20% from a Q3 low seen on Aug. 20 at $500/mt.
Teekay has started to see increases to tanker spot market earnings, but Time Charter Equivalents remain at lower-than-desired levels for shipowners at current spot rates. Suezmaxes have clocked in at an average of $11,600/d so far in Q4 and Aframaxes at an average of $10,300/d, up 93.3% and 51.5%, respectively, from Q3 levels, according to Teekay’s Q3 earnings release. TCE levels still sit significantly below Q1 2020, prior to the global pandemic, in which Teekay saw Suezmax TCE levels average $49,000/d and $34,400/d for Aframaxes.
Volatility drives midsize tanker boost
Market participants have been looking toward a Q4 rate recovery as the end of the year typically brings about yearly highs because of numerous seasonal factors — namely weather delays and increased demand.
“I think it’ll still be a healthy quarter and we may see further improvements as weather delays and other seasonal limitations on the logistics chain come into play,” Mackay said.
In 2020, the Houston Ship Channel saw just over 45 hours of closures in Q4 due to winter-related weather conditions, compared with a fogless Q3, a trend that only picks up heading into January and February, according to Platts weather logs.
Weather-related delays typically have the most impact on Aframax ships, which typically have a narrow fixing window of five to 20 days in advance. Freight strength often trickles into the larger Suezmax ship play as charterers are forced to look elsewhere for rate relief in periods of high Aframax costs.
“What we’re are seeing on the Aframax segment and, to a lesser degree, the Suezmax segment, is … more pockets of volatility,” Mackay said. “To us, it’s indicating that things are starting to tighten up.”
So far in Q4, the benchmark 70,000 mt USGC-UK Continent Aframax route has averaged $18.92/mt, up 45.2% from the Q3 average. The Suezmaxes have seen a similar jump, with Q4 averaging 40% above Q3 for the 145,000 mt USGC-UK Continent route. Recent activity Nov. 4 in the paper market hinted at expectations of a firming market, with Forward Freight Agreements traded at $19.5960/mt, or Worldscale 115, for the November 70,000 USGC-UKC contract and $21.30/mt, or w125, for December.
Teekay currently owns and operates a fleet of 26 Suezmaxes, 14 Aframaxes, and nine Long-Range 2 tankers.