In the last article, I concluded by stating what should be obvious to readers- once the “Pandemic”, or “Virus”, or whatever we call it, is “over”- however defined, things will be a whole lot different. Making such a declaration is really the easy part; drilling down, and trying to get towards specifics, is much harder. It’s impossible to dodge the topic of the floating storage and contangos- as hard as I try. My opinion, based on various recent webinars and interviews with executives, intermediaries and consultants, along with my own experience in these markets, is that tanker markets will remain “stronger for longer”- if one considers VLCCs at $50K – $60K/day in that category. For now, we are seeing oil production cutbacks on the demand side. But the supply side, often harder to fathom, is a co-determinant of market strength, or not. It’s also highly nuanced- when it comes to congestion and vessels out of the spot market fray.
While $zillions/day for VLCCs excites the media (including non-shipping) and certainly gets investors’ blood boiling- while pumping up stock prices, that’s a spike- not sustainable over longer periods of time, one that actually scares “non momentum” type investors away. And “fair weather friends” are not what is needed now- or ever, really, on shipping’s investment front. Capacity utilization for tankers in Q3 and Q4 of 2020 is what will drive the hires; a tight market for an extended period of time will attract investor capital. It’s not a prediction- but a hope more vessels are out of circulation, and away from the margin, whether due to congestion, floating storage, or something in between. Longer term, beyond 2020 and into 2021, the low order book for tankers, driven by uncertainties about how newbuilds’ propulsion might fit into the path towards IMO2050, is not such a bad thing. Whether equity markets will recognize these positive fundamentals is another question entirely.
One of the most informative webinars, hosted by the research arm of a top institutional brokerage, featured a top C-suite executive with a decades long view of the oil services business- kind of a first cousin of shipping. The moderator, a leading analyst of suppliers and providers of services to drillers (as well as the various oil and gas producers) asked the all important question of “What’s going to be different…when we come out on the other side?” His emphatic answer was, “There will be less capital…” citing “…too much debt, too many executive teams, and too many companies.” Consolidation is a likely consequence in the oil services arena. For shipping, we’ve heard some of this before- but now, on the finance side, there is a real possibility for government debt (issued in response to the pandemic) to crowd out purely commercial instruments.
One important area not covered in the oilfield commentary has to do with mariners on vessels- but again, certain comments, viewed analogously, provide useful guidance. The comments about oil service technology inform here. Yes, “workers” will return- but the pandemic has exposed vulnerabilities that auger in favor of more automation on rigs ashore and afloat. The plight of stranded seafarers, a terrible thing to be sure, is yet another driver towards efforts to reduce (not eliminate- no automated vessels suggested) crews on ocean going vessels. Various other crewing-related difficulties, laid bare by the pandemic, will also drive this trend.