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Floating Distillate Storage - Clean Tankers

May 01, 2020 12:35 PM ETDSSI, NMM, SBNA, STNG, TNK, TRMD47 Comments
RockieK profile picture


  • 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

Shield of Achilles designed by John Flaxman, 1846.

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


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

This article was written by

RockieK profile picture
My name is G. "Rockie" Kennedy and although I am professionally licensed, I comment and submit articles as an individual for informational and entertainment purposes only.  I am a registered investment advisor and principal of Hanover Personal Financial Services.  I am experienced in the industry since 1997 with an education in finance and economics.  My degree is in finance with a concentration of financial planning.  Prior to financial services industry, was a veteran of the armed services experienced in engineering and nuclear power operations.  In the industry I have worked as an associate financial advisor, stock broker, and investment and tax consultant.  I have been publishing on Seeking Alpha anonymously since 2013.I am a student of Dow Theory in that I believe the markets are leading indicators for the U.S. Economy.  I follow a collection of individual stocks in my personal portfolios and select others in the transportation and industrial sectors.  Periodically I will submit an article on a stock or fund that has caught my attention for other reasons, but none of my articles are intended to be investment advice. I believe in modern portfolio theory, using a core and satellite approach in an attempt to generate alpha in a portfolio, and that individuals should be responsible for, and free to include individual securities in their portfolios.

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Comments (47)

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?
writes an article about the play of a century and has no positions
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 profile picture
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 profile picture
@robfromFla, thank for the read and the question. I did an overview of $FRO here:

HariSeldon522 profile picture
Thx for your article!!!!
nicholas davout profile picture
Very good article thank you. Very educational for investors.
EURN isn't big enough to warrant consideration?
RockieK profile picture
@nicholas davout, Thank you for both the read and the comment. Actually I included Euronav in Contango With Me - Tanker Breakeven Analysis.


Euronav operates in the crude oil or dirty market rather than the clean products/distillate market.
EURN does have new VLCC's hitting the water soon though, prime candidates for the first charter being product storage.
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 profile picture
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 profile picture

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.


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 profile picture
$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 profile picture
Another great article. Thanks.
RockieK profile picture
And thank you for the comment and the read.
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 profile picture
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 profile picture

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 profile picture
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 profile picture
Good explanatory article.
RockieK profile picture
Thank you. I appreciate the compliment and the read.
Why are all of the tankers I bought getting crushed?
cscott24 profile picture

Seems to be inverse to the general market now. Don't know why, but that's how they are trading at the moment.
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.
Thats true. Most companies pay exceptional divident. Like the preferred of TNP.
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?
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 profile picture
@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 profile picture
In diamond s annual report (March 27) they say at that point most ships are on spot. I think you’re incorrect here
mkonrad1282 profile picture
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
I think a tanker bet is essentially a bet on guaranteed profits for Q2. Continued contango is icing at this point.
cscott24 profile picture

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 profile picture
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.
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