When some crude futures traders are paying to dump their paper barrels before they turn into real barrels and there is no place to put real barrels, companies that own oil tankers can party like it’s 1999. That’s what happened on Monday and looks to be happening again on Tuesday.
Of five tanker stocks, four posted double-digit gains Monday and two were trading up by double-digit percentages again in Tuesday’s premarket. Teekay Shipping Corp. (NYSE: TK) jumped more than 20% on Monday and traded up another 17% Tuesday, while Nordic American Tankers Ltd (NYSE: NAT) added 19% on Monday and was up another 14% in Tuesday’s premarket. Tsakos Energy Navigation Ltd. (NYSE: TNP) added more than 11% on Monday and traded up more than 25% Tuesday morning.
Frontline Ltd. (NYSE: FRO) gained nearly 13% Monday and traded up about 2.7% Tuesday morning, while Diana Shipping Inc. (NYSE: DSX) traded up 2.3% on Monday and was up about 1.7% Tuesday.
Global land-based storage tanks have been filling up since late last year when the Saudi’s and Russian’s decided to open the taps on production. The COVID-19 pandemic has caused the global economy to screech to a halt, reducing demand by as much as 30 million barrels a day, while production cuts are not scheduled to begin until May.
The global tanker fleet has an estimated capacity of around 400 million barrels, a significant portion of which is available as floating storage tanks. It’s not cheap, but for oil traders who believe that prices will begin to rise again in June, paying a daily rate of $100,000 or more to store the oil for several weeks could be a winning bet for a couple of months, especially with crude prices in negative numbers.
Except for Frontline, which has gained about 76% over the past three years, tanker stocks have been trading lower since July 2018. Tsakos has lost about 25% over the three-year period, and Nordic American is down more than 30% over that period. Teekay is down more than 50% and Diana Shipping is down nearly 60%.
For the tanker party to continue, price differentials have to remain wide enough to account for the cost of floating storage. With production cuts of around 10 million barrels a day are due to begin in May, the oversupply could still remain as high as 20 million barrels through at least June. By then, however, producers will have to rein in production. If they can’t sell the oil or store it, they have to stop pumping it out of the ground.
Jim Burkhard of IHS Markit commented, “Beyond the second quarter of this year, we anticipate that “stay at home” orders will ease and production cuts will diminish the severe global oil supply surplus. But until then, emergency conditions exist in the oil industry owing to the massive demand collapse.”