The World Is "Crying Out For Diesel"; Product Tankers Could Win Big

Product tanker owners Ardmore, INSW, Scorpio see scramble for diesel supplies

Retail gasoline prices in the U.S. are up 45% year on year. Diesel used by American truckers is up 75% and just hit an all-time high. But this is not just an American problem. Pain at the pump is global. And so-called product tankers — ships designed to transport cargoes such as diesel, gasoline and jet fuel — are in prime position to profit.

Fuel flows globally to where it earns the highest return. Case in point: As U.S. diesel prices have skyrocketed, American exports of diesel have surged, because demand in other countries is higher.

U.S distillate fuel exports hit 1.74 million barrels per day (b/d) in early April, nearing record levels, according to preliminary data from the Energy Information Administration (EIA). Total U.S. exports of all refined products in April rose 28% year on year.

“There has been outright panic-buying of diesel,” said Anthony Gurnee, CEO of product-tanker owner Ardmore Shipping (NYSE: ASC), during a conference call on Wednesday.

Ardmore specializes in MR tankers, a vessel class with capacity ranging from 25,000-54,999 deadweight tons (DWT). Clarksons Platou Securities said that modern-built MRs were earning $49,800 per day in the spot market as of Friday. That’s more than quadruple the average rate for full-year 2021. Clarksons puts the breakeven rate for such vessels at $18,000 per day.

“The world is really crying out for diesel and that’s causing refinery margins to spike,” said Lois Zabrocky, CEO of International Seaways (NYSE: INSW), during a conference call on Wednesday.

INSW’s product tanker fleet primarily consists of MRs and LR1s (55,000-79,999 DWT). Modern LR1s are earning $50,400 per day in the spot market, according to Clarksons, which puts the breakeven rate for such ships at $19,000 per day. Current LR1 rates are almost quadruple their full-year 2021 average.

Larger LR2s (80,000-119,00 DWT) that handle high-volume, long-haul runs are showing even steeper gains. Rates for modern LR2s jumped 21% on Friday to $58,600 per day, said Clarksons.

The worldwide diesel market is “extremely tight” and the Russia-Ukraine war “has exacerbated the global diesel shortage,” said James Doyle, head of corporate development at Scorpio Tankers (NYSE: STNG), during a conference call on April 28.

Before the invasion, he said, Russia exported about 1 million b/d of diesel to Europe. That volume has plummeted. “But the diesel shortage in Europe is not new,” he added. “And the shortage extends beyond Europe to Latin America and Africa, which have similar diesel deficits.

“For our MRs, the highest rate increases were for our vessels going from the U.S. Gulf to Latin America, which has less to do with Russia and Ukraine and more to do with increasing demand,” Doyle pointed out.

“We expect the market to tighten further with increased competition for distillate molecules as jet fuel demand returns. This is also having an impact on gasoline. With refineries running in max distillate mode, we are not building significant gasoline inventories ahead of peak driving season. As demand grows and inventories remain low, product tankers will need to be the conduit for filling the global supply-demand imbalance.”

Commodity specialist Argus made the same point on gasoline. “The lack of spare capacity is causing alarm heading into the peak summer driving season,” Argus warned on Thursday. “The situation is compounded by even higher middle-distillate margins, which have boosted supply of diesel over gasoline.”

Usually, rates for tankers that carry crude oil and rates for tankers that carry petroleum products trend roughly in tandem. And if one outperforms the other, it’s usually crude. This year, product tankers are dramatically outperforming crude tankers; larger crude tankers are still below breakeven.

Both crude and product tankers saw rates collapse during the COVID era. Oil production outstripped demand amid lockdowns. The world’s inventories filled with cheap crude and products bought at the trough.

Ever since, those inventories have been drawn down instead of using tankers to import new supply (because new supply is much more expensive than the petroleum still in storage bought at the trough).

Due to this practice, stockpiles were already historically low months before Russia invaded Ukraine. In November 2021, Alphatanker published a report called “Welcome to the great diesel squeeze,” which warned: “It’s now apparent that global gasoil and diesel markets are tightening at an alarming pace with supply shortfalls now hitting key consumer markets worldwide.”

Then Russia invaded Ukraine. “This event immediately laid bare … the risks of severely depleted inventories,” said Evercore ISI analyst Jon Chappell.

Asked why this has boosted product tanker rates so much more than crude tanker rates — given that crude inventories are also historically low — Chappell responded, “Usually the two groups are highly correlated, and usually crude leads and outperforms by measure of magnitude. But we are far from normal times.

“Crude tankers are doing really well in regions directly impacted by Russia’s invasion of Ukraine — the Black Sea, Baltic and the Med — owing to the higher insurance costs and risks of entering those markets. But overall, the crude markets have been balancing new longer trade routes with the inability of OPEC to meet quotas, Russia [being] offline, and China lockdowns. The market is better than it probably should be based on those latter factors, but the low inventories and longer ton-miles [voyage distances] are offsetting some of the macro headwinds.

“Product tankers are benefiting from localized diesel shortages, high refinery margins … and massive trading arbs [arbitrages] that allow traders to pay much higher freight costs and still make a ton on the arb. Inventories are far too low globally and prices will likely remain elevated, forcing more trading in unusual trade lanes, tightening capacity and lifting that market well before and well above crude.

“Eventually crude tankers will catch up, I think, if supply of crude can meet higher refinery demand. But right now, it’s a unique product story. And talking with my oil analyst, it’s hard to see how these diesel shortages ease or the strong tanker markets end,” said Chappell.

Among the universe of listed shipowners, Clarksons Platou Securities said that “product tankers are sailing up as the winning sector year to date.”

Rates are surging on “exploding refining margins,” said Clarksons. It maintained that “the products sector looks primed to gain further.”

Through Thursday’s close, the stocks of Scorpio Tankers and Ardmore Shipping were up 106% and 114% year to date, respectively. Shares of International Seaways — which owns both crude and product tankers — were up 50% year to date.

Listed product tanker owners have just reported more losses for the first quarter. The rate upswing won’t be fully felt until the current quarter.

Ardmore Shipping reported a net loss of $7 million for Q1 2022 versus a net loss of $8.5 million in Q1 2021. The adjusted loss of 4 cents per share beat consensus expectations for a loss of 8 cents.

Ardmore has 50% of its Q2 2022 available MR spot days booked at $25,500 per day. That compares to rates of $16,513 per day in Q1 2022.

International Seaways reported a net loss of $13 million for Q1 2022 compared to a net loss of $13.4 million in the same period last year. The adjusted loss of 29 cents per share was slightly better than Wall Street expectations for a loss of 30 cents.

The company has 41% of its available Q2 2022 MR spot days booked at an average of $24,500 per day. That compares to $14,030 per day in the first quarter.

Scorpio Tankers reported a net loss of $84.4 million for Q1 2022 compared to a net loss of $62.4 million in Q1 2021. The adjusted loss per share of 27 cents came in much better than the consensus forecast for a loss of 58 cents.

Scorpio has 42% of its available Q2 2022 spot MR days booked at $30,000 per day. Its MR fleet earned an average of $16,305 per day in the first quarter.

Really stupid question, but here goes: Diesel trucks run on biodiesel, right? Or is it like using ethanol blends on some farm equipment, boats, etc., that the gov’t says can use them: they will operate, but tend to break down?

Biodiesel is a red herring, an imaginary “solution” to the shortage of real Diesel fuel. If the Biden regime (they do not have enough expertise among all of them to call it anything like an “administration”) wants to uncork the bottleneck in supply chains, the introduction of plentiful supplies of Diesel fuel to keep the large farming equipment, rail locomotives, and interstate 18-wheelers rolling at top capacity is a vastly effective measure. That means, of course, that the artificial scarcities enforced by strangling the petroleum industry, from exploration and drilling, to refining, and the opening of some key pipelines from oil-rich regions to the existing refineries would have to be lifted, with a promise not to re-impose any of the restrictions on some kind of whim or fit of pique.

Either produce some result, or get off the pot. Dithering is not an option.

“Dithering is not an option.”

Maybe not for you. But this gaggle of chuckleheads can dither until the cows starve to death in the fields.

This is what’s going to absolutely crush the economy
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Correct. As it was explained to me, gasoline is for “ spending”, vacations, cars, getting to and fro….diesel drives GDP, manufacturing, mining, drilling, trucking, locomotives, excavating, etc….

https://www.spamchronicles.com/draft-european-embargo-on-russian-oil-will-france-run-out-of-diesel-western-france/

Vegetable head Joe had no idea what sanctions will do- especially when Russia stops exporting to the west ( reverse sanctions)…and Vlad says Checkmate.

In the UK, Russia’s sanctions blew them up, Russian diesel ceasing…it is near $10 a gallon….coming to the US?

https://apnews.com/article/russia-ukraine-vladimir-putin-business-europe-venezuela-cbe04e87fca44ed3815aba8dd2b65945

So senile Joe is in a panic, trying to buy Venezuelan gas and oil…..my guess is that Maduro says what Vlad says, no oil, gas , or diesel, checkmate.

Yep, I agree with your comment. I was talking to an owner of a 20 truck bull hauling outfit last week. Currently, 4 of her trucks are parked due to drivers. She also told me to prepare for $6 diesel this summer (southwest KS).

I know that they use used cooking oil. Someone corrected me the other day when I complained about them/us using food for fuel again.

But you don't just pour used cooking oil into your tank. That'll kill your engine pretty quick.
First, the oil needs to be clean. You need to filter out all the burnt food particles and whatnot, and usually there's a few chemicals you'll add to make it burn better/cleaner.
The oil needs to be warm and runny to not clog your lines/engine. So any driving in winter, or half the year up north, means you either don't drive, or you install a secondary fuel system with a heater, that you can switch over to once it's warmed up.

So yea, you can do it, but it's a lot more work than just scooping the frying oil out of the grease dumpster at the closest Mickey D's. Once you're set up though, it's pretty cheap fuel, maybe $1/gal from what I've heard, and can be even cheaper if you fond a restaurant that'll let you take their used stuff and it's decently clean.

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