The volatility seen for Suezmaxes and Aframaxes following Russia’s Feb. 24 invasion of Ukraine will remain a constant in the months to come as the market adjusts to disruptions in trade flows, Teekay Tankers CEO Kevin MacKay said.

Freight for midsize Suezmax and Aframax tankers have been in flux since late February as European crude buyers look to replace Russian crude with US Gulf Coast origin barrels.

“Since late February, the Aframax and Suezmax sectors had exhibited significant rate volatility with rates averaging well above the depressed levels seen earlier in the year and throughout 2021,” MacKay said during Teekay’s fourth-quarter earnings call. “We expect this volatility to be an ongoing feature of the market in the near term.”

Freight for the 70,000 mt USGC-UK Continent route peaked April 7-11 at levels 77.4% higher than Feb. 23, the day before the invasion, and has fallen now just over 42.6% from the early April highs, The benchmark USGC-UKC route was last assessed May 12 at w135, or $25.27/mt. Similarly, the 145,000 mt Suezmax USGC-UKC route has fallen 55.2% in the same period after spiking 104.1% from pre-invasion levels to its peak in early April.

Teekay expects that midsize tanker ton-mile demand will continue to see benefit from the shift in trade flows as Europe also looks not only to take barrels from the USGC but also from West Africa and the Persian Gulf.

European crude imports have supported USGC exports with the four-week moving average for USGC crude exports volumes in the the period ending May 6 reached 3.611 million b/d, its highest level since March 2020. The volume in the week ending May 6, however fell 700,000 barrels to 2.879 million b/d.

“A reduction in European crude oil imports from Russia and the sourcing of replacement barrels from elsewhere has resulted in significantly longer voyage lengths which, coupled with the effective removal of Russian-owned tankers from many routes, has led to a much tighter tanker market,” the company said in its earnings release.

The presence of Russian-owned and operated ships currently sits at 5-6% of the global fleet, according to the company’s presentation.

Rates have come off since the peak in early April as the market has largely settled into new trade flows and as intertrade with heavier-tonnaged Very Large Crude Carriers and Suezmaxes has cannibalized Aframax cargo business and put a cap on rates.

In addition to the intertrade, company pointed to several bearish fundamentals that continue to weigh on tanker rates and earnings, namely sky-high bunker prices and stunted global demand resulting from increased lockdowns in China.

Bullish orderbook supports long term outlook

Teekay expects that an extended period of volatile rate movements will bleed into a medium to long term supply draw in dirty tanker supply, pushing the shipowner to keep its fleet further exposed to the spot market.

The current global tanker orderbook as it stands provides support for a bullish long-term tanker segment, resulting from a combination of ever-looming IMO 2030 regulatory standards, high prices for newbuild ships, and fully-booked shipyards through 2025.

“We believe that volatility is here for a while,” MacKay said. “I think longer term, we’re positive on the market given where fleet supply is. So I don’t think you’ll see us rush to lock in midterm, longer-term charters. I think we’re positioning the fleet to be more fully exposed to the spot market.”

The current global tanker orderbook sits at 6.4% of the current fleet, the lowest level seen for at least two decades, the company said.

Accordingly, fleet growth for the crude tanker fleet is expected to peak in 2024, with scrapping slated to increase as IMO 2030 closes in and a large number of the global fleet reaching 20 years, according to S&P Global Commodity Insights. Teekay expect global fleet growth to be at zero-2% in 2022 and 2023, with potential to flip into negative levels past 2024.

Marex Media