Product Tankers on Watch

My interest in product tankers is finally increasing for a variety of reasons. We saw a cold snap disrupt the US gulf refined product supply chain. There are more headlines about returning gasoline and diesel use across the US and Europe. A return of scheduled travel is picking up across the globe with major airlines such as Delta, Southwest, American and JetBlue all reporting a steady rise in leisure bookings – leisure being a key word. China has just eased travel restrictions and expects a 40% of the population to be vaccinated by June (which is at or near the consensus scientists suggests allows herd immunity), just in time for summer travel. Global inventories, once high, have now been brought down to levels where stockpiles will play a negligible role in satisfying demand from here on out. Finally, April is typically the time of year where refineries are concluding maintenance and preparing for the summer season.

Headlines are great, but for those of you who are familiar with my work, you know that I like data to back things up. Here, we will not only try to discover exactly where we are in the market, but we will relate it to 2019 as a proxy. Accounting for net fleet growth over that period should tell us exactly what we need to get back to that previously bullish setup.

Admittedly, when I started this project, I expected some very grim figures – but they never really materialized. This leads me initially to believe we are a bit better off than we may realize.

First, let’s start with the MR2 fleet, which during Q1 of 2019 numbered 1,543 vessels. Today it stands at 1,674, which represents an 8.5% net increase. This includes the 16 vessels already delivered so far this year, and just to keep the reader updated the current orderbook is below.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

Over the course of this comparison, we will be using data from January 1 – March 15 for both 2019 and 2021 figures. Before we begin let’s remind everyone of what MR2 spot rates looked like over that period in 2019.

Source: VesselsValue

Here is that same period in 2021 for reference.

Source: VesselsValue

Note that in 2019 we failed to break below that $10k/day level whereas in 2021 we have only recently seen rates just barely and briefly break the $10k/day level, specifically at $10,053/day for the benchmark Atlantic Basket.

The final piece needed for comparison purposes would be demand side data, specifically the amount of cargo carried, and the cargo miles logged to complete those journeys.

Over the course of January 1 – March 15 of 2019, according to VesselsValue data, the MR2 fleet carried cargoes totaling 252,466,185 MT while logging 408.184 Bn MT NM (Billion Metric Tons Nautical Miles).

At this point, let’s remind everyone that here in the USA we are still only at about 50% of air travel demand according to the TSA‘s own numbers. Jet fuel took the largest hit and between Europe and North/South America it typically represents anywhere from 12%-15% of cargoes. This remains a major hurdle to overcome.

However, over the course of January 1 – March 15 of 2021, despite the lackluster demand from the aviation segment, the MR2 fleet carried cargoes totaling 262,982,734 MT, representing a 4.1% increase. The fleet also logged a total of 426.026 Bn MT NM representing an increase of 4.37%.

So, while the fleet has increased 8.5% since Q1 of 2019 we are seeing cargo miles pick up to the point where they represent a 4.37% increase over that same period. While impressive, and unexpected to a degree, the demand side increase cannot balance out the larger supply side introductions, which has led to this latest round of disequilibrium and consequently lower spot rates.

But before we continue let’s not overlook one key point that impacts MR’s and even LRs slightly more: The fact that if air travel comes back to previous levels in key demand epicenters (forgetting about pushed back demand at this point) this would result in a significant uptick in vessel utilization. Remember, half of that 12%-15% of tanker utilization for jet fuel demand disappeared and has yet to reappear. Some very simplistic math will tell you what happens when it does return and how it impacts the above supply/demand balance cited above. Finally, there is a broad consensus forming regarding air travel that Q2 and Q3 of 2021 will be the time where we see the largest gains as we return to previous levels.

LR1 tankers were hit a bit harder with the loss of aviation demand but they also didn’t have quite the orderbook to contend with either. Q1 of 2019 saw the LR1 fleet total 359 vessels, which today stands at 371, representing net growth of just 3.3%.

Over that same period cited above, the LR1 fleet has seen cargo quantity fall from 71,808,693 MT to 71,802,589 MT, representing a very negligible percentage loss. However, there was a much larger impact on cargo miles as they fell from 155.12 Bn MT NM to 145.053 Bn MT NM, representing a drop of nearly 7%.

The LR1 fleet remains the most challenged in terms of returning demand so far, but it also has the thinnest orderbook with which to contend.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

Finally, the LR2 class has moved from 354 vessels in Q1 of 2019 to a total of 378 today, representing net fleet growth of 6.8% over that period.

Aside from that we are also expecting a rather large influx of vessels for 2021, rivaling past peak delivery years.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

While LR2 cargo quantity has grown significantly, moving from 93,956,667 MT in 2019 to 99,733,117 MT in 2021, representing a 6.14% increase, cargo miles have remained relatively unchanged moving from 227.678 Bn MT NM to 227.093  Bn MT NM, representing a negligible percentage loss.

Conclusion

While Europe is seeing less than positive news lately, with a potential third wave developing in some areas, the path of least resistance at this point (globally) appears to be the one toward normalization.

Elsewhere, the headlines are touting increases in demand for gasoline, diesel, and leisure bookings. The pace will likely be slow at first, but an apt comparison would be to that of a bull whip, which moves ever faster until it hits its peak velocity.

This effect will likely be most pronounced in the LR fleet as it is more closely aligned with travel and leisure (jet fuel) as opposed to the MR fleet. Meaning, the LR fleet will likely be the indicator for the entire tanker market this time around as to when things begin to pick up, including crude demand.

The MR fleet is closely aligned with global macroeconomic activity, making the pace of a global recovery paramount to their prosperity. If macro forecasts for global GDP growth to come to fruition, and the MR fleet is aligned with that growth, we could see 2019’s spot rate levels back on the table for 2022, which were quite acceptable to say the least.