By: Jon Costello
Crude tanker rates have reached levels that would have been difficult to imagine a year ago. On October 9, the Baltic Exchange, which publishes benchmark shipping rates based on assessments by shipbrokers, estimated that a VLCC traveling from the Middle East Gulf to China could generate a round-trip time-charter-equivalent return of $1.41 million per day. While this assessment is a benchmark, not what the average owner earns, it illustrates how extraordinary the market has become. According to the EIA, tanker rates hit record highs in September.
I question how long these conditions can last. The EIA expects most Middle Eastern oil production to recover to pre-conflict levels by the end of the second quarter of 2027, while the IEA forecasts a 2.6 million-barrel-per-day decline in global oil demand this year and an eventual surplus in 2027. Both forecasts are subject to significant uncertainty. Neither agency forecasts tanker rates, but a return to more normal shipping patterns could release substantial vessel capacity and put pressure on freight rates.
I’ve examined ten publicly traded tanker owners to determine how a decline would affect their earnings, financial positions, and valuations. Their stocks have appreciated together, but I don’t believe their shareholders face equal risks. My concern isn’t that tanker companies are earning too much money today. It’s that investors may be paying prices that assume a substantial portion of these earnings will continue, when the conditions producing them could prove temporary. That is the risk I want to examine.