Wednesday, April 22, 2020

The NYFEX Report: Tankers & Toilet Paper

Tanker owners are having a field day but when deciding what to do next they should heed homeowners’ advice and hoard cash like toilet paper.

It’s a close call: Who is binge buying more? Consumers hoarding toilet paper or traders storing oil in tankers?
The rationale for each panic-driven buying binge is of course different.  We hoard toilet paper fearing we will run out. Oil traders buy oil hoping to make a quick buck.
But whether it’s fear or greed that drives each behavior, the two cases also have something in common.  There appears to be scarcity for neither toilet paper nor crude oil, and no underlying reason why demand will increase any time soon. 
In fact, when it comes to oil, forecasts are calling for a precipitous drop in demand now that airlines, cruise ships, and non-commercial vehicles are at a standstill. Arbitrage traders are risking being stuck with cheap oil and no buyers in sight.
Now the real beneficiaries of this sudden surge in oil storage are tanker owners. Very large crude carriers – which have the capacity to store two million barrels – can provide temporary storage, for a “reasonable” fee. 
Tanker stocks – historically among the worst performing – are rallying, and stock pundits are yelling buy, buy, buy, because the best is yet to come.
Or is it? What will happen when demand for floating oil storage dissipates?  When the current “contango” in oil prices – the phenomenon of oil prices today being substantially lower that future oil prices - is over, so will the maniac storage onshore or in VLCCs.
What will happen to oil tankers is similar with what will happen to toilet paper.
I know that if I found an 18-roll of toilet paper at the store tomorrow I would buy it with impunity. And if I found another roll the next day, I would buy that too.
Not that my use of toilet paper has increased. In fact, we have all learned how to become more efficient, doing more with less.
But sooner or later I will realize that toilet paper is no longer scarce.  And at that moment I will stop buying it for a while, using instead my stockpile at home.
Paper manufacturers – who are busy keeping up with the current spike in demand while ringing the cash register – know that the moment of truth will arrive.  After all, we can only use so much toilet paper every day.
Tanker owners are facing the same predicament. They see daily spot rates for oil tankers spike to $150,000 or more, but they know that the more they earn today the less they will earn when refiners begin drawing down their inventories. Just like when consumers begin using their stash of toilet paper.
So here is my advice to tanker owners.  Use your cash windfall wisely.  Forget about quarterly dividends or stock buybacks.  Forget about short-term stock gains and focus on the long game.  
Your prime responsibility is to keep your company alive for the long haul. If the downturn ends up being milder than expected you can always declare a special dividend twelve or eighteen months from now.
Until then please treat your cash like toilet paper: Hoard it!
This article, including the information contained herein, is the intellectual property of Lambros Papaeconomou and NYFEX Research and it may not be copied, reproduced, republished, or posted in whole or in part, in any form, without prior written consent.

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