Tankers: 2020 Starts With A Bang

IMO 2020 Update: Scrubber Premiums Widen. Scrubber fitted vessels continue to command significant premiums as the clock effectively rolls to 2020 and the new IMO 2020 fuel regulations officially kick-in. Scrubber installed VLCCs are earnings $17k/day (~15%) more than non-scrubber fitted peers in the spot market (Suezmax +$11k/day, LR2 +$10k/day, and MR +$6k/day). Since December 1, pro-scrubber tanker names like FRO (scrubbers on ~1/3 of its fleet) and DHT (scrubbers on ~60% of its fleet) have traded up ~20%, respectively, slightly outpacing  peers like EURN (up 16%). It’s still early, and we’ll be watching for any material divergences in equity performance, and whether the market rewards what effectively amounts to TCE alpha.

Fuel Spreads Continue To Widen. Fuel spreads remained relatively wide last week with the VLSFO/HSFO spread at $324/mt in Singapore, and $283/mt in Rotterdam, MGO/HSFO spread at $320/mt in Singapore, and $306/mt in Rotterdam. Notably, the ramp in demand for MGO in Singapore drove the MGO/VLSFO spread to below zero, -$4/mt, but stayed in positive territory in Rotterdam at $23/mt (its worth note data behind that particular spread is relatively thin). At ~$300-$325/mt, current fuel spreads continue to put scrubber investments firmly in the money.

***We have a note on today on the Iranian missile strike and the impact on LNG & Tankers, which we pay post next week. The text below is dated a day prior to the attack (although we think it provides interesting context in retrospect***

U.S./Iran Tensions Rachet Up: Overnight the US On 12/30, U.S. State Department officials said the “maximum pressure campaign on Iran” will intensify in 2020, without mention of which companies or sectors, and when they might be impacted. A senior State Department official added ~1,000 individuals and entities with links to Iran have received sanctions, with the latest round of sanctions targeting companies that have taken cargo from Iran, (most notably, subsidiaries of Cosco Shipping Energy Transportation that sent rates to all high times this past October). According to Iran, U.S. sanctions have cost the country $200B in lost foreign income and investment over the past two years (not exactly a GAAP measure, certainly gets the point across).

We’ll be watching 1) the impact on the Iranian (NITC) tanker fleet, including whether existing tonnage is pushed further to the sidelines, and 2) whether any conflict (economic or otherwise) spills into the Strait of Hormuz, which is an international choke point for LNG, crude and refined product.