Floating Distillate Storage - Clean Tankers

Summary

• Major petroleum distillate futures are also in contango.
• Shipbrokers have reported clean tankers being fixed for floating storage.
• Clean product tanker operators may benefit.

There has been a lot of focus on the floating storage strategy in the dirty tanker market because of the contago in crude oil future prices. However, many distillates futures are in contango as well. While some companies operate strictly in the dirty tanker market (crude oil) others operate either solely in the clean market (distillates) or in both. Let's take a look at how floating storage demand is playing out in the clean tanker market.

Young girls and young men, in all their light-hearted innocence, carried the kind, sweet fruit away in their woven baskets, and in their midst a youth with a singing lyre played charmingly upon it for them, and sang the beautiful song for Linos in a light voice, and they followed him, and with singing and whistling and light dance-steps of their feet kept time to the music. - Homer, The Iliad

Image Source: Shield of Achilles by John Flaxman - CC0, public domain

Introduction

Dance has always been a part of human culture. From ancient times until today when people gather together for celebration or merriment, there is always dancing. In ancient Greece, villagers and families would participate in circle dances accompanies by singing. These dances were called Choreia, and is the dance style Homer eludes to in the Iliad.

It is from the name Choreia that we get the modern term chorea, involuntary muscle movements causing twisting or writhing that appears to flow from one muscle to another. This condition can be caused by Huntington's disease or difficulties from a strep infection called Sydenham's chorea or St. Vitus' dance.

Right now, the global economy, especially crude oil and distillate markets are experiencing what amounts to a grand mal seizure. The chorea exhibited in crude oil markets that forced prices into negative territory and upended the futures markets to the point where carry costs determine price spreads. As land based storage fills or is contracted out, this chorea has spread or flow from crude oil to distillates.

The shipbroker Afinity has been reported to have interested parties wanting to fix newbuild VLCC's to fill with gasoline, rather than crude oil. Now, I'm not saying that this has never been done before. As long as a tanker has not dirtied, it is not a problem. But once a tanker has hauled crude oil, it must be cleaned before it can haul clean products like gasoline, diesel, or jet fuel. So, rather than jump through those hoops, which is impossible in such a short period of time, just charter a clean tanker like an LR2 or LR1.

Overview of Clean Tankers

For those unfamiliar with the clean tanker markets, for the most part the size classes are the same as the dirty markets, they are just referred to differently.

Historically, the largest ships (VLCC) do not operate in the clean markets. The largest size clean vessels would Suezmax or Panamax tankers referred to as Long Range. These are about 150 DWT, referred to as LR2 carrying about 1MM barrels, and 75 DTW, referred to LR1 carrying about 500,000 barrels. Smaller than these, we have medium range carriers (MR) about 45 DWT carrying about 300,000 barrels. And finally, Handysize or general purpose carriers (GP) about 25 DWT carrying about 150,000 barrels.

Also, we should remember that the volume carried by these tankers is going to vary depending on the product. Crude oil and distillate volumes are dependent on the density of the fluid. The denser the liquid, the smaller the volume the ship can carry before it reaches maximum draft. In other words, a ship can only sit so low in the water before it becomes unsafe to operate or before it cannot enter a certain port because of depth. So, it can only be filled to a certain point; the more dense the fluid, the less the volume the ship can carry.

Clean Tanker Rates

Just like in the dirty markets, clean tanker charter rates depend not only on ship size, but also route and cargo type. And, rather than get lost in the locker with all the different routes and rates and reports from shipbrokers, let's just look at some aggregate data points provided by the Baltic Exchange.

But, before we get there, a few words on Worldscale. By definition, Worldscale is "a nominal freight scale applying to the carriage of oil and oil products in bulk by sea."This allows owners, brokers, and customers to more easily compare rates given the differences between vessels, routes, and cargoes. The best explanation comes from the Maritime Industry Knowledge Center:

Worldscale is a unified system of establishing payment of freight rate for a given oil tanker's cargo. Prices are an agreed upon percentage of the published Worldscale rate, with Worldscale 100 meaning the rate will be the Worldscale published rate, Worldscale 125 would be 125% of the rate and Worldscale 75 would be 75% of the published rate. Prices fluctuate in negotiations according to market conditions.

So, that does not mean that a medium range tanker fixed at WS100 is more expensive than an LR2 fixed at WS85. WS100 for an LR2 is different than WS100 for MR tankers; they are different base prices. Each nominal vessel size has its own rate based on a round trip voyage. These Worldscale rates are set annually, are available by subscription only, and membership includes a nondisclosure agreement. Since it is a standard accepted the world over, many shipbrokers report aggregate information in Worldscale values. This includes the Baltic Exchange.

Last week, the exchange reported that LR2 rates started out in the WS270 range, but surged to over WS500 by the end of the one week. LR1 rates gained 160 to WS425 and MR rates were reported to be between WS425 and WS450. GP rates also surged from WS250 to between WS550 and WS575. They even reported one fixture at WS615. In summary, this is huge; 4 to 5 times nominal rates.

This compares to a month ago when LR2 rates were reported in the range of WS170 and LR2 rates were about WS160. A month ago, MR rates were running below nominal expected at WS 95, while GP rates were high in the WS220 range.

But, it has not been a steady increase. Really, these rates have just recently jumped. Two weeks ago the Baltic Exchange was reporting LR2 rates of WS240 and LR1 rates at WS235. MR rates were running below WS140, and GP rates at about WS205.

So, with the breaking of oil markets, the presumptive filling of land based storage, and the recent reports of clean product tankers being fixed for floating storage, it appears the distillate markets and therefore product tankers markets have entered a similar situation to the dirty tankers. So, we can do an analysis similar to the one we did in Contango With Me - Tanker Breakeven Analysis only with respect to the distillate futures contango.

Distillate Contango

Although a lot of attention has been paid to the price spreads in crude oil futures, distillate products have been seeing their own contango. These products include gasoline, diesel or fuel oil, and jet fuel.

Based on recent prices, we start with the following data:

The displayed prices are per gallon of the commodity. The futures contract covers 42,000 gallons per contract, or 1000 barrels. However, it is not the per gallon price we are interested, it is the spread between the spot price and futures price.

Contango Break Even Rates

Assuming that the entire carry cost associated with floating storage is taken up by charter rates, we can calculate the maximum cost producers or traders can afford to pay for a given vessel size. Here, we assume LR2 vessels hold 1MM barrels, LR1's 500,000 barrels, MR's 300,000 barrels, and GP's 150,000 barrels.

It is doubtful the smallest product tankers would be used for floating storage, but we are including them in the analysis anyway. Now, we can determine general breakeven points based on potential price spreads and time in storage.

Price Spread	30	60	91	121	152	182	213	243	274	304	335	365
$0.025	$35,000	$17,500	$11,538	$8,678	$6,908	$5,769	$4,930	$4,321	$3,832	$3,454	$3,134	$2,877
$0.050	$70,000	$35,000	$23,077	$17,355	$13,816	$11,538	$9,859	$8,642	$7,664	$6,908	$6,269	$5,753
$0.075	$105,000	$52,500	$34,615	$26,033	$20,724	$17,308	$14,789	$12,963	$11,496	$10,362	$9,403	$8,630
$0.100	$140,000	$70,000	$46,154	$34,711	$27,632	$23,077	$19,718	$17,284	$15,328	$13,816	$12,537	$11,507
$0.125	$175,000	$87,500	$57,692	$43,388	$34,539	$28,846	$24,648	$21,605	$19,161	$17,270	$15,672	$14,384
$0.150	$210,000	$105,000	$69,231	$52,066	$41,447	$34,615	$29,577	$25,926	$22,993	$20,724	$18,806	$17,260
$0.175	$245,000	$122,500	$80,769	$60,744	$48,355	$40,385	$34,507	$30,247	$26,825	$24,178	$21,940	$20,137
$0.200	$280,000	$140,000	$92,308	$69,421	$55,263	$46,154	$39,437	$34,568	$30,657	$27,632	$25,075	$23,014
$0.225	$315,000	$157,500	$103,846	$78,099	$62,171	$51,923	$44,366	$38,889	$34,489	$31,086	$28,209	$25,890
$0.250	$350,000	$175,000	$115,385	$86,777	$69,079	$57,692	$49,296	$43,210	$38,321	$34,539	$31,343	$28,767
$0.275	$385,000	$192,500	$126,923	$95,455	$75,987	$63,462	$54,225	$47,531	$42,153	$37,993	$34,478	$31,644
$0.300	$420,000	$210,000	$138,462	$104,132	$82,895	$69,231	$59,155	$51,852	$45,985	$41,447	$37,612	$34,521
$0.325	$455,000	$227,500	$150,000	$112,810	$89,803	$75,000	$64,085	$56,173	$49,818	$44,901	$40,746	$37,397
$0.350	$490,000	$245,000	$161,538	$121,488	$96,711	$80,769	$69,014	$60,494	$53,650	$48,355	$43,881	$40,274
$0.375	$525,000	$262,500	$173,077	$130,165	$103,618	$86,538	$73,944	$64,815	$57,482	$51,809	$47,015	$43,151
$0.400	$560,000	$280,000	$184,615	$138,843	$110,526	$92,308	$78,873	$69,136	$61,314	$55,263	$50,149	$46,027
$0.425	$595,000	$297,500	$196,154	$147,521	$117,434	$98,077	$83,803	$73,457	$65,146	$58,717	$53,284	$48,904
$0.450	$630,000	$315,000	$207,692	$156,198	$124,342	$103,846	$88,732	$77,778	$68,978	$62,171	$56,418	$51,781
$0.475	$665,000	$332,500	$219,231	$164,876	$131,250	$109,615	$93,662	$82,099	$72,810	$65,625	$59,552	$54,658
$0.500	$700,000	$350,000	$230,769	$173,554	$138,158	$115,385	$98,592	$86,420	$76,642	$69,079	$62,687	$57,534
$0.525	$735,000	$367,500	$242,308	$182,231	$145,066	$121,154	$103,521	$90,741	$80,474	$72,533	$65,821	$60,411
$0.550	$770,000	$385,000	$253,846	$190,909	$151,974	$126,923	$108,451	$95,062	$84,307	$75,987	$68,955	$63,288
$0.575	$805,000	$402,500	$265,385	$199,587	$158,882	$132,692	$113,380	$99,383	$88,139	$79,441	$72,090	$66,164
$0.600	$840,000	$420,000	$276,923	$208,264	$165,789	$138,462	$118,310	$103,704	$91,971	$82,895	$75,224	$69,041
$0.625	$875,000	$437,500	$288,462	$216,942	$172,697	$144,231	$123,239	$108,025	$95,803	$86,349	$78,358	$71,918
$0.650	$910,000	$455,000	$300,000	$225,620	$179,605	$150,000	$128,169	$112,346	$99,635	$89,803	$81,493	$74,795
$0.675	$945,000	$472,500	$311,538	$234,298	$186,513	$155,769	$133,099	$116,667	$103,467	$93,257	$84,627	$77,671
$0.700	$980,000	$490,000	$323,077	$242,975	$193,421	$161,538	$138,028	$120,988	$107,299	$96,711	$87,761	$80,548
$0.725	$1,015,000	$507,500	$334,615	$251,653	$200,329	$167,308	$142,958	$125,309	$111,131	$100,164	$90,896	$83,425
$0.750	$1,050,000	$525,000	$346,154	$260,331	$207,237	$173,077	$147,887	$129,630	$114,964	$103,618	$94,030	$86,301

Click to enlarge

Price Spread	30	60	91	121	152	182	213	243	274	304	335	365
$0.025	$17,500	$8,750	$5,769	$4,339	$3,454	$2,885	$2,465	$2,160	$1,916	$1,727	$1,567	$1,438
$0.050	$35,000	$17,500	$11,538	$8,678	$6,908	$5,769	$4,930	$4,321	$3,832	$3,454	$3,134	$2,877
$0.075	$52,500	$26,250	$17,308	$13,017	$10,362	$8,654	$7,394	$6,481	$5,748	$5,181	$4,701	$4,315
$0.100	$70,000	$35,000	$23,077	$17,355	$13,816	$11,538	$9,859	$8,642	$7,664	$6,908	$6,269	$5,753
$0.125	$87,500	$43,750	$28,846	$21,694	$17,270	$14,423	$12,324	$10,802	$9,580	$8,635	$7,836	$7,192
$0.150	$105,000	$52,500	$34,615	$26,033	$20,724	$17,308	$14,789	$12,963	$11,496	$10,362	$9,403	$8,630
$0.175	$122,500	$61,250	$40,385	$30,372	$24,178	$20,192	$17,254	$15,123	$13,412	$12,089	$10,970	$10,068
$0.200	$140,000	$70,000	$46,154	$34,711	$27,632	$23,077	$19,718	$17,284	$15,328	$13,816	$12,537	$11,507
$0.225	$157,500	$78,750	$51,923	$39,050	$31,086	$25,962	$22,183	$19,444	$17,245	$15,543	$14,104	$12,945
$0.250	$175,000	$87,500	$57,692	$43,388	$34,539	$28,846	$24,648	$21,605	$19,161	$17,270	$15,672	$14,384
$0.275	$192,500	$96,250	$63,462	$47,727	$37,993	$31,731	$27,113	$23,765	$21,077	$18,997	$17,239	$15,822
$0.300	$210,000	$105,000	$69,231	$52,066	$41,447	$34,615	$29,577	$25,926	$22,993	$20,724	$18,806	$17,260
$0.325	$227,500	$113,750	$75,000	$56,405	$44,901	$37,500	$32,042	$28,086	$24,909	$22,451	$20,373	$18,699
$0.350	$245,000	$122,500	$80,769	$60,744	$48,355	$40,385	$34,507	$30,247	$26,825	$24,178	$21,940	$20,137
$0.375	$262,500	$131,250	$86,538	$65,083	$51,809	$43,269	$36,972	$32,407	$28,741	$25,905	$23,507	$21,575
$0.400	$280,000	$140,000	$92,308	$69,421	$55,263	$46,154	$39,437	$34,568	$30,657	$27,632	$25,075	$23,014
$0.425	$297,500	$148,750	$98,077	$73,760	$58,717	$49,038	$41,901	$36,728	$32,573	$29,359	$26,642	$24,452
$0.450	$315,000	$157,500	$103,846	$78,099	$62,171	$51,923	$44,366	$38,889	$34,489	$31,086	$28,209	$25,890
$0.475	$332,500	$166,250	$109,615	$82,438	$65,625	$54,808	$46,831	$41,049	$36,405	$32,813	$29,776	$27,329
$0.500	$350,000	$175,000	$115,385	$86,777	$69,079	$57,692	$49,296	$43,210	$38,321	$34,539	$31,343	$28,767
$0.525	$367,500	$183,750	$121,154	$91,116	$72,533	$60,577	$51,761	$45,370	$40,237	$36,266	$32,910	$30,205
$0.550	$385,000	$192,500	$126,923	$95,455	$75,987	$63,462	$54,225	$47,531	$42,153	$37,993	$34,478	$31,644
$0.575	$402,500	$201,250	$132,692	$99,793	$79,441	$66,346	$56,690	$49,691	$44,069	$39,720	$36,045	$33,082
$0.600	$420,000	$210,000	$138,462	$104,132	$82,895	$69,231	$59,155	$51,852	$45,985	$41,447	$37,612	$34,521
$0.625	$437,500	$218,750	$144,231	$108,471	$86,349	$72,115	$61,620	$54,012	$47,901	$43,174	$39,179	$35,959
$0.650	$455,000	$227,500	$150,000	$112,810	$89,803	$75,000	$64,085	$56,173	$49,818	$44,901	$40,746	$37,397
$0.675	$472,500	$236,250	$155,769	$117,149	$93,257	$77,885	$66,549	$58,333	$51,734	$46,628	$42,313	$38,836
$0.700	$490,000	$245,000	$161,538	$121,488	$96,711	$80,769	$69,014	$60,494	$53,650	$48,355	$43,881	$40,274
$0.725	$507,500	$253,750	$167,308	$125,826	$100,164	$83,654	$71,479	$62,654	$55,566	$50,082	$45,448	$41,712
$0.750	$525,000	$262,500	$173,077	$130,165	$103,618	$86,538	$73,944	$64,815	$57,482	$51,809	$47,015	$43,151

Click to enlarge

Price Spread	30	60	91	121	152	182	213	243	274	304	335	365
$0.025	$10,500	$5,250	$3,462	$2,603	$2,072	$1,731	$1,479	$1,296	$1,150	$1,036	$940	$863
$0.050	$21,000	$10,500	$6,923	$5,207	$4,145	$3,462	$2,958	$2,593	$2,299	$2,072	$1,881	$1,726
$0.075	$31,500	$15,750	$10,385	$7,810	$6,217	$5,192	$4,437	$3,889	$3,449	$3,109	$2,821	$2,589
$0.100	$42,000	$21,000	$13,846	$10,413	$8,289	$6,923	$5,915	$5,185	$4,599	$4,145	$3,761	$3,452
$0.125	$52,500	$26,250	$17,308	$13,017	$10,362	$8,654	$7,394	$6,481	$5,748	$5,181	$4,701	$4,315
$0.150	$63,000	$31,500	$20,769	$15,620	$12,434	$10,385	$8,873	$7,778	$6,898	$6,217	$5,642	$5,178
$0.175	$73,500	$36,750	$24,231	$18,223	$14,507	$12,115	$10,352	$9,074	$8,047	$7,253	$6,582	$6,041
$0.200	$84,000	$42,000	$27,692	$20,826	$16,579	$13,846	$11,831	$10,370	$9,197	$8,289	$7,522	$6,904
$0.225	$94,500	$47,250	$31,154	$23,430	$18,651	$15,577	$13,310	$11,667	$10,347	$9,326	$8,463	$7,767
$0.250	$105,000	$52,500	$34,615	$26,033	$20,724	$17,308	$14,789	$12,963	$11,496	$10,362	$9,403	$8,630
$0.275	$115,500	$57,750	$38,077	$28,636	$22,796	$19,038	$16,268	$14,259	$12,646	$11,398	$10,343	$9,493
$0.300	$126,000	$63,000	$41,538	$31,240	$24,868	$20,769	$17,746	$15,556	$13,796	$12,434	$11,284	$10,356
$0.325	$136,500	$68,250	$45,000	$33,843	$26,941	$22,500	$19,225	$16,852	$14,945	$13,470	$12,224	$11,219
$0.350	$147,000	$73,500	$48,462	$36,446	$29,013	$24,231	$20,704	$18,148	$16,095	$14,507	$13,164	$12,082
$0.375	$157,500	$78,750	$51,923	$39,050	$31,086	$25,962	$22,183	$19,444	$17,245	$15,543	$14,104	$12,945
$0.400	$168,000	$84,000	$55,385	$41,653	$33,158	$27,692	$23,662	$20,741	$18,394	$16,579	$15,045	$13,808
$0.425	$178,500	$89,250	$58,846	$44,256	$35,230	$29,423	$25,141	$22,037	$19,544	$17,615	$15,985	$14,671
$0.450	$189,000	$94,500	$62,308	$46,860	$37,303	$31,154	$26,620	$23,333	$20,693	$18,651	$16,925	$15,534
$0.475	$199,500	$99,750	$65,769	$49,463	$39,375	$32,885	$28,099	$24,630	$21,843	$19,688	$17,866	$16,397
$0.500	$210,000	$105,000	$69,231	$52,066	$41,447	$34,615	$29,577	$25,926	$22,993	$20,724	$18,806	$17,260
$0.525	$220,500	$110,250	$72,692	$54,669	$43,520	$36,346	$31,056	$27,222	$24,142	$21,760	$19,746	$18,123
$0.550	$231,000	$115,500	$76,154	$57,273	$45,592	$38,077	$32,535	$28,519	$25,292	$22,796	$20,687	$18,986
$0.575	$241,500	$120,750	$79,615	$59,876	$47,664	$39,808	$34,014	$29,815	$26,442	$23,832	$21,627	$19,849
$0.600	$252,000	$126,000	$83,077	$62,479	$49,737	$41,538	$35,493	$31,111	$27,591	$24,868	$22,567	$20,712
$0.625	$262,500	$131,250	$86,538	$65,083	$51,809	$43,269	$36,972	$32,407	$28,741	$25,905	$23,507	$21,575
$0.650	$273,000	$136,500	$90,000	$67,686	$53,882	$45,000	$38,451	$33,704	$29,891	$26,941	$24,448	$22,438
$0.675	$283,500	$141,750	$93,462	$70,289	$55,954	$46,731	$39,930	$35,000	$31,040	$27,977	$25,388	$23,301
$0.700	$294,000	$147,000	$96,923	$72,893	$58,026	$48,462	$41,408	$36,296	$32,190	$29,013	$26,328	$24,164
$0.725	$304,500	$152,250	$100,385	$75,496	$60,099	$50,192	$42,887	$37,593	$33,339	$30,049	$27,269	$25,027
$0.750	$315,000	$157,500	$103,846	$78,099	$62,171	$51,923	$44,366	$38,889	$34,489	$31,086	$28,209	$25,890

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Price Spread	30	60	91	121	152	182	213	243	274	304	335	365
$0.025	$5,250	$2,625	$1,731	$1,302	$1,036	$865	$739	$648	$575	$518	$470	$432
$0.050	$10,500	$5,250	$3,462	$2,603	$2,072	$1,731	$1,479	$1,296	$1,150	$1,036	$940	$863
$0.075	$15,750	$7,875	$5,192	$3,905	$3,109	$2,596	$2,218	$1,944	$1,724	$1,554	$1,410	$1,295
$0.100	$21,000	$10,500	$6,923	$5,207	$4,145	$3,462	$2,958	$2,593	$2,299	$2,072	$1,881	$1,726
$0.125	$26,250	$13,125	$8,654	$6,508	$5,181	$4,327	$3,697	$3,241	$2,874	$2,590	$2,351	$2,158
$0.150	$31,500	$15,750	$10,385	$7,810	$6,217	$5,192	$4,437	$3,889	$3,449	$3,109	$2,821	$2,589
$0.175	$36,750	$18,375	$12,115	$9,112	$7,253	$6,058	$5,176	$4,537	$4,024	$3,627	$3,291	$3,021
$0.200	$42,000	$21,000	$13,846	$10,413	$8,289	$6,923	$5,915	$5,185	$4,599	$4,145	$3,761	$3,452
$0.225	$47,250	$23,625	$15,577	$11,715	$9,326	$7,788	$6,655	$5,833	$5,173	$4,663	$4,231	$3,884
$0.250	$52,500	$26,250	$17,308	$13,017	$10,362	$8,654	$7,394	$6,481	$5,748	$5,181	$4,701	$4,315
$0.275	$57,750	$28,875	$19,038	$14,318	$11,398	$9,519	$8,134	$7,130	$6,323	$5,699	$5,172	$4,747
$0.300	$63,000	$31,500	$20,769	$15,620	$12,434	$10,385	$8,873	$7,778	$6,898	$6,217	$5,642	$5,178
$0.325	$68,250	$34,125	$22,500	$16,921	$13,470	$11,250	$9,613	$8,426	$7,473	$6,735	$6,112	$5,610
$0.350	$73,500	$36,750	$24,231	$18,223	$14,507	$12,115	$10,352	$9,074	$8,047	$7,253	$6,582	$6,041
$0.375	$78,750	$39,375	$25,962	$19,525	$15,543	$12,981	$11,092	$9,722	$8,622	$7,771	$7,052	$6,473
$0.400	$84,000	$42,000	$27,692	$20,826	$16,579	$13,846	$11,831	$10,370	$9,197	$8,289	$7,522	$6,904
$0.425	$89,250	$44,625	$29,423	$22,128	$17,615	$14,712	$12,570	$11,019	$9,772	$8,808	$7,993	$7,336
$0.450	$94,500	$47,250	$31,154	$23,430	$18,651	$15,577	$13,310	$11,667	$10,347	$9,326	$8,463	$7,767
$0.475	$99,750	$49,875	$32,885	$24,731	$19,688	$16,442	$14,049	$12,315	$10,922	$9,844	$8,933	$8,199
$0.500	$105,000	$52,500	$34,615	$26,033	$20,724	$17,308	$14,789	$12,963	$11,496	$10,362	$9,403	$8,630
$0.525	$110,250	$55,125	$36,346	$27,335	$21,760	$18,173	$15,528	$13,611	$12,071	$10,880	$9,873	$9,062
$0.550	$115,500	$57,750	$38,077	$28,636	$22,796	$19,038	$16,268	$14,259	$12,646	$11,398	$10,343	$9,493
$0.575	$120,750	$60,375	$39,808	$29,938	$23,832	$19,904	$17,007	$14,907	$13,221	$11,916	$10,813	$9,925
$0.600	$126,000	$63,000	$41,538	$31,240	$24,868	$20,769	$17,746	$15,556	$13,796	$12,434	$11,284	$10,356
$0.625	$131,250	$65,625	$43,269	$32,541	$25,905	$21,635	$18,486	$16,204	$14,370	$12,952	$11,754	$10,788
$0.650	$136,500	$68,250	$45,000	$33,843	$26,941	$22,500	$19,225	$16,852	$14,945	$13,470	$12,224	$11,219
$0.675	$141,750	$70,875	$46,731	$35,145	$27,977	$23,365	$19,965	$17,500	$15,520	$13,988	$12,694	$11,651
$0.700	$147,000	$73,500	$48,462	$36,446	$29,013	$24,231	$20,704	$18,148	$16,095	$14,507	$13,164	$12,082
$0.725	$152,250	$76,125	$50,192	$37,748	$30,049	$25,096	$21,444	$18,796	$16,670	$15,025	$13,634	$12,514
$0.750	$157,500	$78,750	$51,923	$39,050	$31,086	$25,962	$22,183	$19,444	$17,245	$15,543	$14,104	$12,945

Click to enlarge

Now, because each commodity has different price spreads, potential rates based on prices spreads will differ. As a result, we can look at each size class relative to the commodities. This results in the current breakeven rates based on the current commodities' contango.

Shipbroker reported rates for the past week averaged $134K for LR2, $97K for LR1, $58K for MR, and $63K for Handysize GP. For all of these rates, there is no profitable storage timeframe greater than 1 month. Therefore, the commodities' contango must increase, or clean tanker rates must come down.

So, in the short term, we will find out who has pricing power; the traders or the shippers. If the shippers have the power, expect those futures price spreads to increase and rates to stay elevated. Which brings us to the point of looking at some of the shippers that could benefit.

Clean Tanker Shipping Companies

The following is a list of some of the publicly traded companies that have exposure to the clean product tanker shipping market. It is presented without recommendation or comment. In order to be included in this list, the company must operate in the clean product tanker trade (distillates). Not included on this list are any companies that have majority exposure to drybulk or container shipping, and companies operating only smaller vessels and/or barges.

Two companies in the list were also included in the article Contango With Me - Tanker Breakeven Analysis. They have exposure to both clean and dirty segments, while the rest of these have little or no exposure to the dirty market. Readers should consider this list of companies as a starting point for your own due diligence.

The largest of the companies profiled is Scorpio Tankers Inc. (STNG). The company owns or operates more than 120 clean product tankers The majority of ships are medium range MR vessels, with the next largest quantity being long range LR2. Most all of these ships operate in the spot market.

Image Source: STNG 6 Mo. Chart - Used with permission from StockCharts.com

The next largest company would be Teekay Tankers (TNK). This is one of the companies that was highlighted as having majority exposure to the dirty segment. However, as well as VLCC, Suezmax, and Aframax crude carriers, the company also owns eight LR2 product carriers and leases in a ninth.

Image Source: TNK 6 Mo. Chart - Used with permission from StockCharts.com

Slightly smaller in market cap is the next company, Diamond S Shipping (DSSI). Although the company does operate some ships in the crude oil segment, the majority of the fleet is medium range MR product carriers. These ships range from 36 to 51 thousand DWT.

Image Source: DSSI 6 Mo. Chart - Used with permission from StockCharts.com

Next we have TORM Plc. (TRMD). Torm has been around for more than a century, and operated in only the clean products segment. The company has a large fleet that includes a dozen LR2's, nine LR1's, a few Handysize GP tankers, and 57 medium range MR tankers. TORM operates vessels worldwide in the spot market.

Image Source: TRMD 6 Mo. Chart - Used with permission from StockCharts.com

The last company in the list is Navios Maritime Acquisition Corporation (NNA). This is the other company that was included previously because of exposure to the crude oil markets via VLCC tankers. But, the company also operate clean product tankers of 10 LR1 and 18 medium range MR size. The MR tankers operate on fixed charters, but 7 of the LR! tankers operate in the spot market.

Image Source: NNA 6 Mo. Chart - Used with permission from StockCharts.com

Just like with the cure oil tanker companies, no one knows if these companies will benefit from current market conditions or if stock prices will rise from where they are. Realistically, there are a lot of uncertainties and risks to consider; probably more so than with the crude oil tankers.

RISKS

Obviously, demand is down and storage capacity is in short supply, hence the floating storage trade in the clean products tanker market. But, it must be realized the distilled products can spoil. Diesel, gasoline, and jet fuel cannot be stored indefinitely. Compared to unrefined crude oil, the "life expectancy"of these products is very short.

While demand is down, refineries are cutting production, but it is not enough. There is still too much supply of these products. So, what is going to happen to the products stored at sea once demand does return? Or what if demand does not return significantly for a longer than expected period of time? Once all this chorea in petroleum markets subsides, demand for these product tankers could significantly drop and remain low for an extended period.

Plus, there is always the company specific risks associated with every one of these stocks. As such, each investor should do their own due diligence and consider whether any of these companies is appropriate for inclusion in a portfolio.

Conclusion

Just like with the crude oil tanker companies, probably the biggest decision that needs to be made is what is the investment time frame? Time charter rates are volatile in normal times, and these are certainly not normal times. And, just like with all other contangos, the entire trade could unwind quick.

Thank said, keep in mind that these companies have low trading volume. So, increased volatility in the stock market can quickly overwhelm any of these stocks. Most only trade a few million shares a day on average, but some only trade a few hundred thousand on average. So, institutions or large orders can burn through the book quickly causing prices to move drastically.

Finally, given the longer-term outlook on the global economy, dividend yields and pay rates should not be a primary consideration. Just like with the crude oil tankers, none of these companies should be considered a long-term buy and forget.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This information is not investment advice, nor is it a recommendation to either buy or sell any securities. Retail investors should do their own research and fully understand the risks associated with these companies.

Comments

[rickbkwik]

Thanks for the educational article.
Its off subject, but the distilled products have a shelf life as you stated. Obviously some of it will go bad.
Does it have to be redistilled, sold down market as another product, costs of redistillation?
What do the owners do with it?

[hombreingwar]

writes an article about the play of a century and has no positions

[martyr1777]

I may be wrong in this, but I've never heard of a Suezmax LR... LR2 are usually clean Aftamaxs.

And no mention of TNP? They have 3 LR2's and 7 Handysize on the spot market. Another 6 Handymaxs coming off contracts this year, most in the spring. And 11 LR1s 1 on the spot market and 2 with profit sharing charters.

Its quite poor that you would leave them off the list yet have TNK on it. Plus, you need to proof read your article.

Thanks all the same though.

[robfromFla]

What are your thoughts on $FRO?

They operate 71 vessels; a mixture of LR2, Suez and VLCC's.

20 (18 owned, 2 under management) LR2/Aframax tankers.
23 VLCC's (14 owned, 1 investment in finance lease, 2 chartered, 3 finance leases)
28 Suezmax (16 owned, etc)

[RockieK]

@robfromFla, thank for the read and the question. I did an overview of $FRO here:

seekingalpha.com/...

[HariSeldon522]

Thx for your article!!!!

[nicholas davout]

Very good article thank you. Very educational for investors.
EURN isn't big enough to warrant consideration?

[RockieK]

@nicholas davout, Thank you for both the read and the comment. Actually I included Euronav in Contango With Me - Tanker Breakeven Analysis.

seekingalpha.com/...

Euronav operates in the crude oil or dirty market rather than the clean products/distillate market.

[martyr1777]

EURN does have new VLCC's hitting the water soon though, prime candidates for the first charter being product storage.

[damonbrooks45]

This is insane! Why are these tanker stocks not move north fast. Are the markets unaware of these massive growths that look like will last into Q3/4!

[RockieK]

Overall, the money play we have been seeing is risk off into cash. The stocks aren't moving because a) don't believe b) don't know c) don't care for the risk.

I wish I could tell you they will move before the opportunity unwinds, but I sold my crystal ball for a big pack of Cottenelle and some magic beans. (BTW - I'm long Kimberly Clark)

[Nazim Macbeth]

@damonbrooks45

I do think there is some skepticism about the sustainability of current earnings. Will tankers go from gangbusters to bust in a few quarters? Hard landing vs. soft landing. This article references some research by Michael Webber, who suggests that rates will most likely remain buoyant for 12-18 months at least.

www.hellenicshippingnews.com/...

I believe tanker companies offer a good risk/reward profile at their current levels. Post recession, the downside is that we probably end up where we are now; the upside could be plus 2X. This could be an excellent arbitrage play on oil storage, but we need to buckle up and prepare for some serious volatility.

One risk is extremely weak oil demand throughout 2021. By then production will have recalibrated and we could get into a low production, low demand scenario. Scrapping would be the only arrow left in the quiver for tankers. Even so, this would most likely create a depressed rate environment. On the other hand, a robust economic recovery next year coupled by strong oil demand on the back of all this contango action could make things pretty interesting.

[Bsoidonym]

$EURN will get 3 more new VLCCs in Q4/20 and Q1/21. If floating storage is still in demand by then, they might use them as clean tankers first.

[Bsoidonym]

Another great article. Thanks.

[RockieK]

And thank you for the comment and the read.

[9045082992]

For the most part , the momentum traders haven't discovered the "clean segment". They are all chasing $NAT. The other point, the insane rates will impact q2 numbers more than Q1.

I'm invested in this segment and own, $TRMD , $NNA, $STNG, $DSSI. Do your own diligence, each company has pro's and cons but the common theme is they will all be making good money.

Serious investors should check this out. www.investorvillage.com/...

[RockieK]

Great info @WC Fraser. Thank for the link to Jefferies - good information. I actually got an email this morning, and hear that VLCC's have dipped below 100K. No telling if it is a change in trend, or just low activity for the week. We'll see...

[Hidden Rock Capital]

www.bloomberg.com/...

Article states that if it wasn't for the storage play VLCC rates would have fell to $9K/day with the OPEC cuts that started this week. We all knew $200-$300K per day rates weren't sustainable but storage shortage hopefully providing a cushion on VLCC rates falling much more.

Next week will be interesting to see how June crude prices & VLCC rates do, and also the first 1Q earnings finally released.

[Free Cash Flow 50]

Producers saw the storage issues coming and bid up tanker rates heavily in March and April. Now, perhaps they are looking at the next few months thinking oil demand will come back coupled with giant production cuts resulting in the recent drop off in rates. Tough to say if the drop off is a blip or the crazy high rate party is over and now onto a normalized rate environment. A lot of variables at work. Tankers will have a windfall of cash coming their way and are dirt cheap. Even if the prices don't budge, there are a lot of ways to win with the equities beat down to these levels. If we have two great quarters combined with two really bad quarters in Q3&4, that still will be a good year overall.

[Hidden Rock Capital]

Good explanatory article.

[RockieK]

Thank you. I appreciate the compliment and the read.

[mgd20]

Why are all of the tankers I bought getting crushed?

[cscott24]

@devinem20

Seems to be inverse to the general market now. Don't know why, but that's how they are trading at the moment.

[looking-for-a-cut]

not sure, i think people hear rates are down 50%!!! but dont realize that rates of 80-100k a day are still extremely profitable. stock prices might jump next week when tankers announce profits.

[Coconut grove]

Thats true. Most companies pay exceptional divident. Like the preferred of TNP.

[hammer63]

Very interesting article. I am curious as to where you obtained the data on DSSI mainly operating their ships under time charters? As disclosed in their Form 10-K, as of March 20, 2020 they have 66 ships of which 14 are on time charters and the remaining 52 trade in the spot market. Do you have updated information that you can share?

[jmouw12]

Must have been an error. You are correct, most of their ships are on spot. I believe most of the time charters are carryover from the ships purchased from CPLP.

[RockieK]

@hammer63, Thank you very much for both the read and the question. It is a very important point, and both you and @jmouw12 is correct. Here's my reasoning for saying what I did:

Diamond management policy is to operate the ships in the spot market or on short term time charters. As of the last annual, management reported that 73% of crude tankers, and 80% of clean were already booked for the year (2020). That was back in March, before this present move in rates. Since my timeframe for the article is only one or two quarters, to me, even those short term charters mean the company is not exposed to the recent move up in rates on most of their ships.

So, true, few ships in the fleet have long term time charters. But, in the short term, a majority had already been fixed. The question is how long are those fixtures? I will have to wait to see once the next quarterly report comes out.

I hope you understand why I said most vessels were being operated on charter right now. If the timeframe of may outlook was extended - say 1 to 2 years, I would have worded it differently.

That said, I can understand perfectly if you do not agree with me. And, I will apologize and ask for your indulgence in this instance.

[Thewaltzy]

In diamond s annual report (March 27) they say at that point most ships are on spot. I think you’re incorrect here

[mkonrad1282]

As June crude futures rally and the the futures spreads decrease, would you say a tanker bet is essentially a bet that contango will increase again as we get closer to June expiration? Or do you think these companies have already had the opportunity to lock in rates that should propel them forward even if the markets normalize? thanks

[Kroxa]

I think a tanker bet is essentially a bet on guaranteed profits for Q2. Continued contango is icing at this point.

[cscott24]

@mkonrad1282

The reality is still that there are too much distillates, crude, gasoline, etc. It's not about the price of the commodity at the moment and the mere fact that supply didn't fall enough since demand essentially went to zero for most of these things. Storage will be a huge issue for the near and possibly intermediate term.

[mkonrad1282]

I agree with your investment thesis but I do think there are obvious correlations to the commodity price or more specifically futures spreads between spot and the rest of the curve. next week we should get an idea of the degree of spot exposure vs long term contracts.