In a world full of gloom, tanker owners are the only ones smiling

Ship owners are having a ball as oil producers, refiners and traders chase crude oil tankers for storage, driving up rates at a time when the global economy and trade are reeling under demand destruction caused by the virus outbreak.

To that extent, it has flipped an industry adage: ‘shipping is the best industry when the economy is on the way up and the worst on the way down’.

Crude oil storage

Crude tankers are increasingly been sought after to store crude oil on the high seas due to a slump in global crude prices and lack of storage space on-land with the hope that the cargo would fetch better prices when the market rebounds.

State-run oil refiner Indian Oil Corporation (IOC) has floated a tender to hire a very large crude carrier, also known as oil super tanker, and a Suezmax carrier for six months each.

“This could be for storage purposes,” said a shipping industry executive.

“Tanker owners are making a killing,” he said.

A VLCC is quoting at $100,000 plus a day for a six-month contract, while a Suezmax carrier is going for as much as $55,000 a day for a similar period.

In the spot market, a VLCC currently fetches at least $170,000 a day for its owner whereas a Suezmax is quoting at $90,000 a day.

“For us, these are interesting times while the world is in adversity,” added an executive with a local shipping company.

Typically, tankers are hired to store oil at sea for 60 to 120 days. In some cases, it may even go up to 180 days.

Currently, the storage is mostly for crude and the demand is mostly for bigger ships such as oil super tankers and Suezmax carriers due to economies of scale. But, smaller ships such as medium range (MR) tankers are also being considered.

Even product tankers are being requisitioned to store jet fuel, petrol and diesel after transport services ground to a halt as countries’ closed borders and imposed lockdown restrictions to slow the spread of the virus.

India’s oil refiners have scaled down import of crude and cut refinery run rates to deal with the demand slump.

Demurrage

Tankers that were hired by state-run oil refiners on long-term charters before the pandemic hit the world are occasionally bringing crude into the country.

“There is now delay in discharging that oil because refineries have cut production. So, tankers are waiting at the port’s anchorage for as much as 12 days to get the cargo out,” the industry executive said, adding that a tanker is currently waiting at the anchorage of New Mangalore port for the last ten days to discharge the cargo.

Such delay in discharging the oil would typically allow the shipowner to collect penalty, known as demurrage, from the importer.

“Oil importers have started asking ship owners not to levy demurrage for the delays citing a government directive to state-owned major ports to waive such charges during the lockdown period,” he said.

For ships hired on long term charters, demurrage won’t come into play; the penalty for delay is mostly applicable for spot cargo shipments, which refiners are trying to evacuate as quickly as possible to avoid demurrage.

“If ship owners don’t agree on demurrage, they will ask for higher freight,” he said.

The boom is expected to last for at least for six months.

“The moment people who are storing the oil, start selling the oil at the same time as countries lift restrictions, then all these ships that are currently storing oil, will flood the market and the rates will come crashing down the way it went up,” the industry executive said.

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