The Tanker Market Paradox
Today's spot TCE benchmarks for oil tankers point to an all time high.
This is not wrong, but the magnitude would be greater than what the market really is at, as these are based on the very few fixtures that originate from inside the Arabian Gulf. Adjusting that for the majority of fixtures that originate from the Gulf of Oman, would bring us to a more realistic picture.
However, the new benchmarks lack the depth of historical quotes to enable a good assessment of the state of the market, and what decisions to make for the near / medium term.
Now, if you turn your attention to the 1 and 3 year time charter rate spreads, the picture becomes a little clearer.
For those contemplating an immediate opportunity, you may find the reason you need to take action now.
For those investing for the long term, you may find instead the reason to wait it out a little more.
Heck, why not do both?
The chart plots the spread between a 3 year time charter rate, and a 1 year time charter rate as a percentage of the 1 year rate.
Decision A : One year rates are at all time highs, highly influenced by the spot market, which is also at all time highs. A decision to take on a prompt time charter, or buy a prompt delivery ship, could mean a payoff on asset in a ridiculously short span of time.
What does the data say? A 15 year old Suezmax was sold at $91 mil, and reportedly fixed for a 12-18 month TC at $ 180k/day. The math is probably that more than half of the asset price is paid for by the end of the first year. Similar cases can probably be found for other ship segments as well. A 20 year old MR for $ 36 mil, and fetching a 1 year TC rate at $ 33k/day? Sounds very sweet.
Decision B : The market is not just pricing in the spike, but it's pricing in the fade as well. A 3 year TC that is 40-60% of the 1 year TC rate? Unheard of. But it also tells us that the market believes that current freight spikes are highly influenced by geopolitics, which could disappear in a relatively short span of time.
So is the longer term a risky bet?
Let's look at the MR segment where assessed spot TCEs are closer to market. MR Asia spot TCE would need to drop by over 60% before an MR on a 3 year TC rate starts worrying. Is it likely? Perhaps, but earnings continue to be buffered by the possiblity of supernormal spot TCEs for the next few months.
Today's freight market is at the most volatile it has been. Clear, insightful and prompt information will enable decisive and timely actions that could make the difference between a profitable project, or one that is not.
More details in our Term Charter monthly report.
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