Covid-19 impact: Tanker rates boom as demand for oil storage surges

Vessel charges jump up to seven times to $160,000-170,000 per day since February

With onshore oil storage facilities being exhausted and companies resorting to floating storage, hiring rates for very large crude carriers have gone up about seven times since February. Shipping firms say the rates are likely to go up further as the availability of such vessels has dropped sharply.
 

“Vessel charges have risen exponentially to about $160,000-170,000 a day from $25,000 in February, primarily because of increased floating storage across the globe. Going ahead, the charges may move up further to $200,000 per day as well,” Rahul Bhargava, director (commercial and operations) at Essar Shipping, told Business Standard.
 

At the other end of the business, dry bulk cargo carriers are facing a downturn. The Baltic Dry Bulk Index is depressed and has moved closer to 650 levels from nearly 1,000 early this year. “With bulk trade weak due to the ongoing pandemic, only firms with equal exposure to both segments (tanker and bulk) will be able to balance the overall impact,” said Bhargava.

The Baltic Dry Index, issued by the London-based Baltic Exchange, is a composite index of time charter average rates of Capesize, Panamax, and Supramax vessels. It is a proxy for dry bulk shipping stocks and is regarded as shipping market bellwether.
 

Essar Shipping has one very large crude carrier (VLCC) in its fleet, as against 11 crude oil carriers with peer Great Eastern Shipping. State-owned Shipping Corporation of India has five VLCCs in its tanker fleet. Seven Islands Shipping has one VLCC, with its entire 19-vessel fleet being in the tanker segment. VLCC is an oil tanker used for transporting huge quantities of crude oil across the oceans. The global fleet size of VLCC stands at 800 vessels.
 

“Already 10 per cent of the total VLCCs of the world market have been moved in for storage. With onshore storage hitting capacity in the next few weeks, we may see 5-10 VLCCs getting into floating storage daily,” said Rajesh Verma, lead analyst-tanker shipping at Drewry Maritime Services. “Earlier, crude oil traders were rushing to store the commodity in anticipation of increase in prices in the coming months. Now, several oil producing countries are increasing storage as consumption has dropped owing to the Covid-19 pandemic,” said Verma.

Among crude oil producing countries, Saudi Arabia has been in the forefront of storing oil in VLCCs, industry officials said.

Tanker freights have increased significantly since the beginning of the year and are currently hovering around 1,600 level on the Baltic Dirty Tanker Index. Freight rates moved up from around 1,100 points to the current level in a span of 10 days, mainly after crude oil futures turned negative last week.
 

Indian shipping companies are, however, facing a peculiar problem. They gain from tanker demand so long as their vessels are not stuck in India. Following a recent circular from the ministry of shipping to waive the demurrage charges for cargo buyers, shipping companies have not been able to cash in on the vessel rate hikes.

“Crude oil brought to India on $25,000 a day rate for Indian Oil Corporation recently would be ideally sailing back for another trip at a higher rate of close to $2,00,000. But the cargo buyer (Indian Oil) is not ready to release the vessel and since demurrage is waived, shipping companies are losing out on the business opportunity the world is cashing in on. It is a major disadvantage to bring vessels to India,” said Anil Devli, chief executive officer at the Indian National Shipowners Association.

In the bulk segment, among domestic shipping companies, Great Eastern Shipping has a fleet of 46 vessels, of which 12 are bulk carriers. Shipping Corporation, with a fleet size of 60 vessels, has 15 bulk carriers.
 

Industry experts are of the view that if crude oil prices remain below $20 per barrel for a longer period, non-Opec countries could look to lower production as it would be economically unviable to produce crude oil. West Texas Intermediate was trading around $11 a barrel while Brent crude was higher at $20 on Tuesday.