Key Issues Macro Environment Oil Market Tanker Market April 2020 - PowerPoint PPT Presentation

Key Issues Macro Environment Oil Market Tanker Market April 2020

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3 What Do You Think? VLCC Spot Rates Averaged About $170,000/day Yesterday One Year Time Charter Rates Are About $80,000/day • Stay in the Spot Market! • Lock in Some Earnings and Sleep Well

Macro Environment

5 The Outlook is Changing Fast… Morgan Stanley (March 17): • Global economic growth will slow to 0.9% this year, “the lowest since the global financial crisis.” The firm’s base case for global growth is -0.3% in the first quarter, -0.6% in the second quarter, 1.8% in the third quarter and 2.5% in fourth quarter. • The U.S. economy will see 1.8% growth in the first quarter of 2020, 0.3% in the second quarter, 0.2% in the third quarter and 0.2% in the fourth quarter. Morgan Stanley (April 3): • Lowered its first-quarter GDP forecast to -3.4% from -2.4% and its second-quarter GDP forecast to -38% from -30%. "We expect the U.S. economic recovery will be more drawn out than previously anticipated, marked by a deeper drop into recession and slower climb out," the economists said. • Real GDP to contract 5.5% in 2020, the steepest annual drop in growth since 1946. • Third-quarter GDP growth estimate: 21%.

6 Macro Environment Expect Massive Increase in Unemployment & Decline in GDP in Q2 • But it is not a recession like 2008 • It is a sharp COVID-contraction Most Likely Outcome (Base Case) • Successful management of COVID-19 – April peak in OECD • Fiscal & monetary policy successful in quickly mitigating macroeconomic side-effects • Rebound in employment & GDP in H2 2020 Less Likely Outcome (Low Case) • COVID-19 pandemic accelerates through June • Fiscal & monetary policy insufficient to quickly mitigate • Slow rebound in employment & GDP in 2021 We Expect Base Case Confirmation in May • Reduced Covid-19 incidence and “stay at home” eased in June

Oil Market

8 Oil Market • Double whammy for oil market Net global surplus 15+ mbd leads to • • COVID-19 demand destruction: 13+ mbd sharp drop in oil prices • OPEC supply increase: about 2 mbd VLSFO-HFO spread has narrowed from • nearly $400/tonne to less than $100/tonne 140 120 100 $/BBL 80 60 40 20 07.1 08.1 09.1 10.1 11.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 20.1 Oil price (usd/bbl):

9 Potential Oil Market Scenarios Oil Demand Projected To Plunge 13+ mbd In 20Q2 How Will OPEC Respond? • Scenario 1: Price War • Saudis Increase Production • 15 mbd Stockbuild Fills Onland Storage & Leads To Sharp Jump In Floating Storage • Oil Prices Fall Below $20/bbl; US Shale Activity Drops Sharply • Tanker Rates Soar In 20Q2, Stay High In 20Q3 • Scenario 2: Sharp OPEC+ Cut • 5-10 mbd Cut Will Lead To Smaller Stockbuild, Less Floating Storage • Oil Prices Could Stay Above $30/bbl; Smaller Impact On US Shale • Tanker Rates Fall Back Significantly, Especially In 20H2 Oil Demand Should Recover As Virus Subsides • But Inventory Overhang Likely To Haunt Tanker Market Into 2021

10 OPEC vs. US Shale • Low oil prices should allow OPEC to regain market share from US shale 34 32 30 28 26 24 mbd 22 20 18 16 14 12 11.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 20.1 21.1 22.1 OPEC Crude Production N. American Production

Tanker Market

12 Tanker Market Scenarios Tanker Supply Side Very Positive • Orderbook at 25-Year Low • Crude Tanker OB at 8% of Fleet • Product Tanker OB at 6% Downside Risk For Tanker Demand • Big OPEC Cut Possible • Would Lead To Quicker Stockdraw • Lower Trade Demand And Floating Storage Upside Potential For Demand • Prolonged Period of Excess Production • On-land Stocks Remain Full • Floating Storage Remains High • Oil Prices Remain Low, Leading To Further Reductions In US Shale Output

13 Floating Storage • Low oil prices led to formation of steepest contango in history, making floating storage increasingly profitable • Collapse in jet fuel demand has supported clean tanker floating storage Contango vs Profitable VLCC Rates 25 180,000 16 160,000 20 14 140,000 12 120,000 15 10 M DWT 100,000 $/day $/bbl 8 80,000 10 6 60,000 4 40,000 5 2 20,000 - 0 0 3-month 6-month 9-month 12-month 15-month 18-month 11.1 12.1 13.1 14.1 15.1 16.1 17.1 18.1 19.1 20.1 Contango Period Breakeven TC -Rate 31-March Breakeven TC -Rate 3-April Floating Storage (m dwt) Contango 31-March Contango 3 April

14 Sensitivity of VLCC Rates to OPEC Production VLCC Spot Rates vs. OPEC Production (20Q2) 180,000 160,000 140,000 VLCC Rates, $/day 120,000 100,000 80,000 60,000 40,000 March Production 20,000 0 25 26 27 28 29 30 31 32 OPEC Crude Output, mbd

15 What Do You Think? Will an OPEC agreement to cut more than 5 mbd be announced over the coming month? • Yes • No

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