Danish oil product tanker company Torm sees an even better second quarter after bumper first three months, and a potential fallout from floating storage may be limited by a revival in gasoline demand.
Executive director Jacob Meldgaard said in an interview with S&P Global Platts that “even if we have a slide in freight rates currently, it is from a very high level, and I expect we will have a result in Q2 that will outperform Q1.”
Meldgaard noted that the “lucrative second quarter” comes from two types of storage: the current logistical inefficiencies in the value chain causing unintentional floating storage and an actual increased interest in floating storage through improved market structure.
The first arises from operational issues from on land storage where “tanks are up their brim” and is more prevalent in the oil product space, he explained. The latter stems from a contango in the oil price, where the forward price is higher than the prompt, and is a bigger factor for crude, he added.
Meldgaard spoke after Torm recorded its strongest first-quarter results in a decade, in which it achieved time charter equivalent rates of $23,643 a day compared with $17,949 a year earlier.
“The strong start has continued and has further enhanced so far in Q2 where Torm has secured record bookings, with 69% of the earning days covered at $29,188 a day,” Meldgaard said.
Torm said the booming product tanker market was boosted by a bullish crude tanker market and up to 53% of the LR2 fleet trading dirty. It said that high product exports out of China due to lower domestic demand as a result of the coronavirus pandemic and significant delays at the Panama Canal provided further support.
The group said the strong market had continued into Q2 due to a significant oversupply of oil products and a sharp decrease in spot oil prices. The bullish conditions have driven product tanker freight rates to record highs so far in Q2.
GASOLINE COULD BE KEY
With gasoline making up about 14% of global consumption in the product tanker market, Meldgaard sees a potential bright spot after the floating storage bonanza ends. The Torm CEO said “even without the economy coming out of lockdown, you are already seeing individual behavior shifting to driving in cars in the biggest market we have.”
He pointed that gasoline demand could bounce back more strongly as consumers switch to cars for longer journeys in the US over flights and trains given the challenges around the COVID-19 pandemic.
“There will be an unwinding on one side of floating storage and inefficiencies as economies come back, but there may be areas where consumption patterns are actually higher potentially,” Meldgaard suggested.
Gasoline went down in the first half of April to 5 million b/d and has increased by almost 50% to 7.4 million b/d, Meldgaard said, noting that gasoline is the most significant part of the product tanker market “by some distance.”
SCRUBBERS ON TRACK
The Danish group said that it expects to install a total of 49 scrubbers, showing no sign of wavering despite the narrowing in the spread between high sulfur fuel oil and very low sulfur fuel oil.
As of March 31, Torm had installed 32 scrubbers and as of May 14, Torm has installed 37 scrubbers, the company said.
“Of the remaining 12 installations, one is expected to be conducted in the second quarter and nine in the third quarter. The remaining two scrubbers will be installed on the two LR2 newbuildings to be delivered in the fourth quarter of 2021,” it said.
Some shipping companies have been canceling scrubbers as the economics of investing in gas exhaust cleaning systems comes into question with cheaper premium fuels, although many analysts still see the long-term benefit in them.
Meldgaard said “a balanced approach has been working well for us” with half the fleet installed with scrubbers and half the fleet running on cleaner fuels.
It said delays to scrubber retrofits and newbuilding deliveries from Asian shipyards indicate lower-than-expected global net fleet growth in 2020, while lower ordering indicates lower global fleet growth at a time when the product tanker order book relative to the fleet is already at a record level.