‘All the shareholders’ wishes are coming true’ yet VLCC stocks are down
“WHEN you look at investing in tankers, right now, there are lot of stars aligning,” said Frontline chief executive Lars Barstad during a Capital Link crude tanker roundtable on Tuesday.
“All the shareholders’ wishes are coming true at the same time — before Christmas even. And still, people are reluctant to let the share prices run. I’m a bit stumped.”
A bemused-sounding Barstad said, “We traded at about $30 per share a year and a half ago [versus $22 per share currently], all on expectations and air. Now the physical numbers are there and shareholders seem to be reluctant to push the buy button.”
Tuesday was yet another down day for most tanker stocks, despite very large crude carrier rates holding firm above six figures per day.
Among listed VLCC owners, Frontline’s share price is down 13% since November 21, Okeanis Eco Tankers is down 11% since November 18, and DHT is down 9% since November 21.
Asked what’s driving the pullback, DNB Carnegie analyst Jorgen Lian said, “There are more people calling me and asking: when is the peak? That’s a near-term perspective. And there is a lot of uncertainty.
“It’s easier to sell people a story that things have upside rather than saying: now we have the numbers; why aren’t you giving credit for it? Because people are already looking around the next corner for the next bad guy.
“But I think the important part is trying to understand how firm this is when you look further ahead. What I think investors really need to notice is that, when markets are tight, as they are right now, the upside optionality to potential earnings in tankers and shipping overall is incredibly interesting,” said Lian.
Reasons the rally could be sustained
The Achilles heel of listed shipping company executives is that they talk their book even when the market turns out to be a bust, fostering a “boy who cried wolf” aura that breeds scepticism towards bullish arguments that may turn out to be correct.
Bullish arguments abound, said the Capital Link panellists.
“What’s different now from what we’ve seen for quite a few years is that there’s a tremendous amount of volume being concluded at rates of between $110,000 and $120,000 per day [for VLCCs],” said Barstad.
“Business is actually being conducted. If you look back to the rate spike we had in June, in relation to the Iran-Israel-US [conflict], virtually no ships were fixed at the peak. We’ve now had 23 days when the Baltic TD3 [Middle East Gulf-China time-charter equivalent] index has printed north of $100,000 per day. The last time that happened was 2020. Prior to that you have to go back to 2008.”
There is still more potential upside before year-end, said Barstad.
“I’m always afraid of jinx things, but December is a short month because charterers and owners go on holiday too. The Baltic index doesn’t print between Christmas and New Year’s, so there is a chance that we can still have some hectic days as the January stems in the Middle East need to get covered, and that’s basically going to start happening any minute now.”
Svein Moxnes Harfjeld, chief executive of DHT, maintained that this is not just a seasonal rally. “I would not be worried about this only being a winter phenomenon,” he said.
“We are in for a pretty good period now. There will still be some swings and volatility. Large tankers will always be a volatile sector and when you are in a strong market like we have now, the volatility in nominal terms can be quite scary numbers — you can have things flipping $20,000 or $30,000 per day. But that should not be a reason to be worried.
“In general, there will be very good earnings for tankers for quite a while,” Harfjeld said, pointing to oil prices holding up despite high supply, implying strong underlying crude demand, combined with the aging of the tanker fleet.
The Opec variable
Panellists discussed two potential questions for rates: how Opec decides its production policy in 2026, and the outcome of Ukraine-Russia peace talks.
According to Mikkel Seidelin, chief commercial officer of Teekay Tankers, “There has definitely been inventory growth this year and that’s expected to continue next year. If Opec continues to unwind its cuts or maintains its current production, and you also see non-Opec continuing to pump, it should lead to oversupply in the short term.
“If that continues, there’s an argument, which we have heard many times, that the front end of the oil price [curve] will collapse, leading to contango, which should then continue the current strong tanker market we’re seeing now, and should continue to encourage the long-haul voyages that have picked up the VLCC market and by extension the suezmax market.
“The question is: Will Opec allow this to happen?” said Seidelin.
“Are they happy, like what they were in the good or bad old days, to flood the market and flush out some of the higher-cost oil producers in the short term by over-supplying the market and seeing prices come off? Or will they adjust and cut a little bit earlier before we see the contango?”
The answer will determine “when we see the peak of the current spike and a potential softening”.
“But even if we do see a softening, the market is so tight on the supply side that we don’t believe we’re going to have a complete collapse. It’s simply too tight. Every time we see a new event happening — geopolitical, weather, whatever it might be — we see rates react. That means there’s no extra surplus of tonnage to be provided,” said Seidelin.
The Russia-Ukraine war variable
Asked about Ukraine-Russia peace consequences, Harfjeld said, “It very much depends on how we get to peace. Is there a negotiated agreement between several parties that make concessions to restore some sort of normality, or is there peace because Russia simply won the war? The outcomes could be very, very different.
“It all really hinges on whether Russia can access Europe again or not,” explained Harfjeld.
“If Russia, for some reason, is able to sell its oil to Europe again, you will reverse the disruption that you had starting two or three years ago, and more Atlantic barrels will move east [to Asia] again, and that’s going to be a big-ship business, as we had before.”
In contrast, the Russian-oil-to-Europe scenario implies a negative for suezmaxes and aframaxes.
Seidelin, whose company operates midsized tankers, agreed. “If you have an end of the conflict and trade patterns reverse, it’s going to have an impact. It’s hard to argue against that. You can’t have it both ways.”
Peace would presumably lead to an end to sanctions on Russia’s shadow fleet*, raising the question of whether these vessels will remain a part of the global capacity equation, or whether they will disappear via scrapping, abandonment or commercial obsolescence.
According to Barstad, “There is actually a playbook for this in 2016 when sanctions were lifted on Iran, and we saw the NITC fleet move fairly quickly back into trading efficiently and servicing Iranian exports. In some sort of peace treaty, I’m pretty sure it will be demanded that sanctions are lifted on the Russian-controlled fleet.
“It’s a very complicated picture, but I think the easiest way to think about it is to draw a line at 20 years [ship age],” said Barstad.
“We’re actually sitting here in a market where charterers are facing bills for freight of $12m, $13m, $14m for a single voyage and they still don’t try to go for a 20-plus-year-old ship. They still go for a fairly modern ship.
“We’ve proven that the 20-year threshold is pretty firm for VLCCs and the same goes for suezmaxes and aframaxes.
“If you have a commercial oil cargo you want to trade, every fixture that happens around the globe happens with options, because people want to retain the option to sell the oil to another [buyer] if the chance comes around. And insuring that cargo is astronomically more expensive for a 20-plus-year-old ship than for a younger ship. The whole system is built up around catering to ships that are below 20 years.
“If you take out all the ships that are dark, gray, blue, green or whatever that are above 20 years, you will come out of this as a wash [if sanctions are lifted]. It’s actually not material fleet growth.”
According to Seidelin, “A lot of the older tonnage is part of the shadow fleet and the older tanker fleet is a release valve for the market. The only reason a lot of these ships are around is because they’re making money. If you have any oversupplied situation, those ships will leave the fleet.
“Whether they get scrapped, laid up or become untradeable is not that important from a market point of view. It will tighten up tonnage and that should mean that if we see a dip, it should be short-lived.”
Barstad said that there has already been a material shift in volumes from shadow tankers to the compliant fleet even before a peace agreement.
“Sanctioned crude is struggling to find a home, and this is good because it means that actors are switching towards compliant barrels, which benefits owners that shy away from the gray or dark kind of oils.
“We’ve been arguing for a long time that eventually, incremental growth from the sanctioned countries is going to stop being incremental growth for [global] exports and we’ll be back to the compliant markets supplying the marginal barrel.
“That’s the big trend we’re seeing now and it has accelerated. It was inevitably going to happen and now we have potentially turned a corner,” said Barstad.
“I didn’t expect the corner to be turned this quickly, and this is why we expect some volatility going forward, but we have an enormous amount of tonnage out there that is not qualified for trading in the compliant market, which makes for very exciting next steps as we move into 2026.”
Nevertheless, the stock market clearly views a potential peace deal between Russia and Ukraine as a negative, thus the lower share prices.
“The takeaway here is that it seems less material than people might think, and it perhaps gets an outsized part of the attention when it comes to investing in tankers, which I think is more of a long-term story,” said Lian.
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