Scorpio Tankers is upbeat on its consolidation with Navig8 Product Tankers as surprising discipline from OPEC members is leading to significant global destocking and US Gulf Coast refined product exports have restarted after Hurricane Harvey, the company said Thursday.
In addition, the company said during its third-quarter 2017 earnings call, the clean tanker order book stands at an historically low newbuild rate of 7.3% for the next three years.
“Current spot markets are stronger than the guidance we’ve been given for the fourth quarter […] we would have not gone through the effort of acquiring the Navig8 fleet without being bullish,” said Scorpio’s president, Robert Bugbee.
“I think things are changing […] the weakness we’ve had until the last couple of weeks has had a lot to do with the hurricane and now you are getting the exports coming back up out of the US Gulf Coast and they are pretty strong,” Bugbee added.
US refined product exports rose 147% compared with 2.96 million b/d in the week that ended September 1, after Harvey drenched the Gulf Coast and closed over 4 million b/d of Texas refining capacity, or 22% of the US total, to 5.01 million b/d in the week that ended November 1, according to US Energy Information Administration data.
Global petroleum inventories dropped by 63 million barrels in Q3, which represents only the second quarterly draw since 2014, the International Energy Agency said in its November oil market report.
Through the merger with Navig8 Product Tankers in May, Scorpio acquired 27 ECO-spec product tankers, including 15 Long Range 2s and 12 Long Range 1s, the bulk of which were built in 2016, one in 2015 and three in 2017.
With the completion of the merger in September, the company owns 106 vessels on the water, with an averageage of 2.2 years.
LR2 SEGMENT IN THE LEAD
The LR2 segment has been outperforming all other clean tanker sectors so far in the fourth quarter, with Scorpio reporting time charter earnings of about $16,500/d for 60% of the days in the current quarter, up 28% compared with Q3. This compares favorably with declines of close to 11% for the LR1 pool and 8% for MRs, the company said.
“The area that is performing the best is your big LR2s and that has nothing to do with the [arbitrage], has nothing to do with weather,” Bugbee said. “It is a fundamental sign that your fundamental demand is very healthy.”
LR2s are the largest product tanker class at 80,000-120,000 dwt and have seen strong exports from the Middle East to Northwest Europe as well as from East Asia and even backhaul demand from the UK Continent to the Middle East has been strong, according to Bugbee.
“LR2s are not [Arabian Gulf-East] dedicated anymore […] they are coming into Northwest Europe, into West Africa and the US Gulf Coast,” he said.
ExxonMobil placed the STI Gauntlet on subjects to carry 80,000 mt of naphtha from the US Gulf Coast to East Asia loading November 21, according to S&P Global Platts fixture logs.
Scorpio officials also see LR2 demand as a sign of favorable dynamics to come for shipowners in the next few quarters.
They said statistics show tanker demand is set to pick up as refinery capacity expansions move closer to the wellhead, thus increasing ton mile demand.
While the Middle East is forecast to add 1.5 million b/d in refining capacity in the 2018-2021 period, according to the 2017 IEA Medium Term Oil Market Report, Latin America’s capacity increase will be limited to 73,000 b/d, which will make for increased product imports.
Particularly favorable to the product tanker outlook is recent shipowner discipline in placing new orders.
“All of the shareholder boards have been pretty focused on maintaining discipline and looking at consolidations,” Bugbee said. “We’ve done Navig8 […] there are other consolidation talks ongoing that I know about.”
The product tanker fleet is expected to grow 7.3% over the next three years without scrapping, compared with 22% over the previous three years, according to an October Scorpio presentation.
“Right now, for the first time ever since [World War II] there is no geographical new area that you look at that is going to become the world’s number one shipbuilder,” Bugbee said, referring to the emergence of Japanese shipyards in the 1950s, South Korea in the 1980s and the development of China’s shipbuilding industry at the start of the new millennium.
Source: Hellenic Shipping News.