More oil is being shipped around the world. Here is a pump jack in Long Beach, Calif.
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Tankers hired to ferry oil across the ocean have rarely been in higher demand; even after large gains their stocks may still have open water ahead of them.
Russia’s invasion of Ukraine upended oil markets, causing crude prices to spike to 14-year highs. Oil producers were the most high-profile winners from high prices, but the biggest beneficiaries of the changes may have been a group of smaller and lesser-known companies: oil tankers. Some of the stocks, including
Ardmore Shipping
(ASC) and
Scorpio Tankers
(STNG), quadrupled last year. As new sanctions have shifted the flow of Russian oil to more distant ports, one analyst thinks the rally could keep going. “This is a cycle that has some life,” says Evercore analyst Jonathan Chappell.
That’s because the recent changes in the industry weren’t just caused by the normal commodity booms and busts that have occurred before. Russia’s invasion has forced more drastic shifts in shipping routes that Chappell expects to persist even after the war is over. And even though shipping stocks have risen a lot, they are still emerging from the deep hole they fell into in the midst of the pandemic.
Oil tanker companies were in a bad place in 2021, with rates to rent tankers falling hard and order books at multidecade lows. Covid restrictions had reduced oil demand and slowed shipping. As countries emerged from Covid, demand increased. But the bigger catalyst was Russia’s invasion. Even before Europe and the U.S. imposed sanctions on Russian oil, trade routes began to change, leading oil-importers to hire tankers for much longer trips. Russia started selling more oil to India and China and less to Europe and the U.S. On Dec. 5, Russia was banned from selling crude to Europe. In addition, European and American companies that ship or insure Russian oil sent to other countries are imposing price caps on that oil. On Feb. 5 the ban and price caps were extended to oil products like diesel and gasoline.
The effect of those sanctions has been to force Russia to sell to new buyers, most of which are located much farther away than Europe. In addition to India and China, countries in South America and Africa are likely to increase their imports of Russian fuel in the coming months, analysts said.
The increasing demand for tankers able to make long journeys comes as the supply of tankers has stayed relatively flat, meaning that demand is outpacing supply. That’s caused rates to spike, with daily rental rates for some kinds of ships quintupling between 2021 and this year.
Chappell said he understands the anxiety investors feel after stocks rise this much. Shipping has historically been a cyclical business; the stocks are small-caps and have historically been volatile. But he thinks that it’s a mistake to sell out now. “Is It Done? No, It’s Only Just Begun,” he wrote in the headline to a note last month.
He called the Russian invasion “a generational geopolitical event that is likely to change seaborne flows of the world’s (still) most important commodity for years,” and argued that it isn’t “fully played out after only 6-9 months.”
The ban on Russian fuel shipments to Europe that went into effect on Feb. 5 may be an even bigger catalyst than the ban on Russian crude oil, Chappell said. China and India don’t import as much fuel like diesel as they do crude, because they have their own refineries to make fuel. So Russia will have to send fuels on even longer and more expensive journeys to find new markets. In the first week of the fuel ban, rates for large tankers jumped 35%.
There is a growing “shadow fleet” of Russian tankers that can transport oil without adhering to price caps. Theoretically that would present competition for the public companies, which need to operate aboveboard and comply with the sanctions. But Chappell said that the shadow fleet is largely made up of very old ships that don’t add to total supply and don’t really compete with the newer ships used by most companies.
So far, tanker companies that focus on transporting fuels have outperformed ones focused on crude, in part because the sanctions on fuel are likely to cause more disruption to the market.
Among the most successful fuel-carriers are Scorpio and Ardmore, whose stocks are up 280% and 390% in the past year respectively.
Teekay Tankers
(TNK), known for its midsize tankers, is up 245%.
Crude tanker stocks, such as Euronav (
EURN
), have outperformed the market, though not by quite as much. Euronav is up 60% in the past year.
DHT Holdings
(DHT) has doubled.
Chappell thinks that both kinds of tanker companies have room for upside, with the crude carriers potentially starting to catch up to the fuel carriers as time goes on. Among the stocks he rates at Outperform are Euronav, which he thinks can rise to $24 from $16.78, for a 43% gain. He also likes Scorpio, which he thinks could gain another 36%.
Write to Avi Salzman at avi.salzman@barrons.com
Credit: marketwatch.com