As I explained in my previous article, the fight between bulls and bears continues when it comes to the oil tankers. The bulls are scratching their heads why the stocks are not going up. Some point out that they will after the earnings. I don’t think so. It is not about the earnings. Everybody knows that they will be good. It is not about the rates. Everybody knows that they are high. It is about perception and belief.
If too many people believe that the rates are unsustainable, then these stocks won’t go anywhere no matter how high the rates go. I think the quarantines need to end and then people can see the rate levels that the tankers get. Maybe then there will be some kind of certainty and visibility.
Over the last few days, the rates have been sliding so I am sure that bears are saying, “I told you so.” Again, as I said before in my previous article, the oil tanker thesis is not about sky high rates. It is about respectable rates.
This brings me to contango. Right now the 3 months brent contago is about $4.50. This amount makes $9 million in 90 days. Such amount supports VLCC rates of $100k per day.
$4.5 x 2 million barrels VLCC can hold = $9 million
$9 million/90 days = $100k
If a trader can find a VLCC for less than $100k, then he pockets the difference. Because this arbitrage is practically risk-free, you know that they are going to charter the vessels.
So as long as there is contango, any contango, there will be a need for storage. And as long as there is need for storage, more and more ships are being taken out of the fleet. And since the land storage is almost full, the tankers are the only game in town.
For the Children’s Guide to Oil Storage Situation, follow the link below.