Oil tanker stocks could be set for a possible resurgence, with oversupply pushing storage capacities to their limits.

The energy market has been hit hard over recent months, with the coronavirus crisis sparking a huge slump in both current and expected demand. While we have seen Russia and Saudi Arabia agree to cut production, the 9.7 million barrels per day is not going to be enough.

The latest International Energy Agency (IEA) report highlights how we could be set for the ‘worst year in the history’ of the sector. That report also put a firm figure on the drop in demand, with April predicted to see a peak drop in demand of a whopping 29 million barrels per day.

Given that the 9.7 million barrels per day cut from Organization of the Petroleum Exporting Countries (OPEC) will kick off on 1 May, this points to a huge amount of oil sloshing being unused. While the report highlighted how the gradual easing on travel restrictions will help improve demand for crude, it also highlights how the coming months are likely to see continued weakness.

For many within the industry, that oversupply at rock-bottom prices will hurt their business. However, this scenario can provide an opportunity for one sector in particular; oil tankers.

The big question for many is quite why energy producers would create the product if prices are so low. Well the current Contango scenario helps explain that, with futures prices significantly higher than current spot.

That highlights the expectations that the rock-bottom levels seen over the past months are going to be a short-term phenomenon rather than a permanent fixture. With oil prices expected to rise in the future, it makes sense for many producers to maintain output with the expectation that they will achieve higher prices down the line.

That will necessitate storage facilities, which are fast filling up as the millions of barrels being produced without any buyer comes onto market. A drop of 29 million barrels per day in demand means an additional 300 million barrels over the course of the month. With onshore storage is being filled up, shifting the focus out to sea, to the benefit of the tanking.

This brings us onto the oil tanker industry, which is typically one of minimal profits, and high debts. However, there are some periods which help pay for those baron years, and this could be one such period. With the gap between demand and supply so high, we are seeing a sharp ramp up in demand for tanker storage, driving daily costs higher.

With many tankers barely breaking even in the past (typically around $20k-$40k per day), we have seen rates of up to $300k per day for Very Large Crude Carriers (VLCC) tankers being achieved. That has come down somewhat since the OPEC+ deal, yet $150k-$200k remains a distinct possibility.

The image below highlights how the price for a VLCC ship has changed over the past decade. This highlights how we are currently seeing the most protracted period of upside for tanker rates since 2008.

As per any contract, a longer deal would likely provide a lower daily return to the tanking company. However, whether the firm seeks to lock in elevated long-term rates, or utilize shorter period to heighten the daily return, profits are expected to surge in the coming months.