Surfing the tanker market through dual crises

Surfing the tanker market through dual crises

Aug. 28 2020 - 4 min

Already a volatile market, the tanker market has swung dramatically in response to the collapse of oil prices and the Covid-19 pandemic.

2020 took the tanker market to new heights as falling oil prices caused charter rates to skyrocket. But even a boom period has its challenges, with owners facing questions of vessel compliance, crew health and safety, and the specter of a market downturn.   

A tale of two crises

In early February, a dispute between Russia and Saudi Arabia led to a flooded oil market, with 6-7 million extra barrels entering the market per day. The impact on tankers was immediate, as storage costs soared and hundreds of vessels were taken off the market to serve as storage units. Week after week oil prices fell, creating a contango situation and increasing Time Charter Equivalent (TCE) rates thanks to cheap bunkers.

Then in March, countries across Europe, Asia and North America instituted lockdowns as a response to the Covid-19 pandemic. This caused an unprecedented drop in oil demand, as public and private transportation ground to a halt. Again the tanker market rose, with ships taken on a speculative basis to store cargo that could only be sold at a loss. By the end of April, these combined crises had pushed oil prices into negative territory for the first time in decades.

Consequences of a boom period

Tankers of all sizes were continuously in use between March and June, leading to a boom in remote surveys. Given skyrocketing charter rates, owners could not afford to lay up vessels for surveys or repairs. This led to hundreds of tankers undergoing efficient remote inspections to assess vessel fitness and allow owners to postpone surveys at yard.

At the same time, lockdowns put a serious strain on tanker crews. The time needed to change crews – approximately two weeks, including a quarantine period for new crewmembers – presented a significant challenge to ship operators. The cost of an idle tanker during this period was prohibitively high, meaning crewmembers had to remain aboard for several extra months.

Anticipating a downturn

Tanker owners, charterers, oil majors and traders have already seen charter rates begin to drop as demand for oil revives. The reopening of countries worldwide has significantly depleted oil stockpiles from early 2020, with charter rates sinking across all asset classes.

Still, high levels of volatility are inherent to the tanker market and easily anticipated. Even as oil tankers enter a period of low activity and decreased freight rates, the next upswing is already on the horizon. The only question is when it will come.