Billionaire John Fredriksen made his fortune shipping oil during the Iran-Iraq conflict in the 1980s. The Ukraine war sent tanker prices soaring, once again a purple patch for the industry.
The EU is planning it ban seaborne imports of Russian oil from next month. Rates measured by the Baltic Index for “dirty” oil tankers are at an 18-year high, up to $110,000 a day for the biggest carriers. Expect high oil prices to persist for some time.
The situation is in stark contrast to previous years. Lower demand for oil following the outbreak of the pandemic meant that many important shipping routes became unprofitable, especially for very large oil carriers.
Tough conditions prompted two of the industry’s biggest carriers, Belgium’s Euronav and Fredriksen-owned Frontline, to announce an all-share merger in April. Share prices of both companies followed higher rates. They have almost doubled since then.
Russia invasion of Ukraine changed the script. In the short term, there is a rush to get Russian oil to Europe before the ban. Traders also divert Russian shipments to more distant destinations, particularly India and China. Crucially, supplies of smaller Aframax and Suezmax tankers capable of serving Russian ports will remain limited.
Fleet size is not keeping pace with the rapid shift in business patterns, notes Rystad Energy’s Erik Grundt. New vessels joining the fleet this year are at a 20-year low. New orders as a share of the fleet remain the lowest since the 1980s. Shipbuilders are focusing on creating new container vessels and LNG carriers. The average age of tankers is almost 11 years with a maximum of 20 years.
Russia’s efforts to strengthen its own tanker fleet are putting further pressure on supply ships. Russia plans to spend $17 billion over the next few years to close a capacity deficit of 750,000 barrels of oil a day, or about 70 ships, Rystad estimates.
The sector’s earnings estimates, which are nearing their peak in 2020, may come under near-term pressure if the war in Ukraine ends. Longer-term capacity constraints mean investors should look for opportunities to get on board.
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