Conventional storage to run out of space

Global oil demand will remain weak unless the world returns to pre-COVID-19 levels. The oversupply of nearly 20 mbpd (which is expected to decline gradually with improving demand and declining production) will lead to a surge in demand for crude oil storage as production cannot be reduced at the pace at which the demand has eroded in the last few months. Surplus oil is rapidly flowing into onshore storage capacities – commercial as well as strategic petroleum reserves (SPR) – across the globe. Market forecasts suggest that the world’s conventional oil storage – which can hold about 3.4 billion barrels – will run out of storage space by end May 2020 and thereafter flow into floating storage in oil tankers.

Increase in floating storage is inevitable

The Brent crude oil futures for June 2020 closed at USD 21.44 per barrel on 24 April. The spread between spot and future crude prices of April 2021 stood at USD 13.18 per barrel whereas cost of storing crude oil on a VLCC for the next one year is USD 14.99 per barrel. Accordingly, traders would refrain from locking vessels for crude oil storage as the current charter rates for VLCCs are not profitable for traders. As of 25 April, nearly 160 million barrels of crude oil is stored at sea. With average oversupply of nearly 20 mbpd, oil companies will lock-in crude carriers to store the surplus production as the conventional onshore storage facilities run out of space over the next few weeks. Overall, the increase in floating storage is inevitable on account of operational limitations rather than storage economics as producers cannot turn off the oil taps at will. A conservative estimate suggests that nearly seven VLCCs per day will be required to store surplus oil even after the proposed production cut of 9.7 mbpd by OPEC+.

The rise in floating storage will limit vessel availability for active trade further increasing vessel day rates, which have already spiked due to the recent chaos in the global oil market. VLCC spot rates on Middle East-China (TD3C) surged 464.7% from ~USD 30,600pd on 5 March to ~USD 173,100pd on 24 April. Spot rates for other vessel classes also followed a similar trend over the same period as a continued decline in crude oil prices led to increased demand for crude carriers. The surge in spot rates initiated a rally in tanker shipping stocks with those under over coverage registering an average gain of 60.9% between 5 March and 24 April. Nordic American Tankers (NYSE: NAT) led the rally with a surge of 114.3% whereas the lowest gain of 34.2% was registered by Euronav NV (NYSE: EURN).

Strong correlation with Baltic FFA

The movement in tanker shipping stock prices has a strong correlation with the spot TCE rates and Baltic Forward Freight Agreements (FFA). The recent data suggests that Euronav NV (NYSE: EURN) stock price has a correlation coefficient of 0.66 with FFA for VLCCs on TD3+1_M (Arabian Gulf to Japan) whereas the correlation coefficient was 0.73 with FFA for Suezmax on TD20+1_M (West Africa to UK- Continent). Frontline (NYSE: FRO) stock prices have a correlation coefficient of 0.66 with FFA for Suezmax on TD20+1_M (West Africa to UK-Continent) whereas the correlation coefficient was 0.70 with FFA for Aframax on TD17+1_M (Baltic to UK-Continent). DHT Holdings (NYSE: DHT) owns and operates only VLCCs and the company’s stock prices reflect a correlation coefficient of 0.71 with FFA for VLCCs on TD3+1_M (Arabian Gulf to Japan).

Source: Baltic Exchange, DMFR, NYSE

Nortdic American Tankers (NYSE: NAT) owns and operates a homogeneous fleet of 23 Suezmax tankers and the company’s stock price has a correlation coefficient of 0.77 with FFA for Suezmax on TD20+1_M (West Africa to UK-Continent).

Source: Baltic Exchange, DMFR, NYSE

Teekay Tankers (NYSE: TNK) stock price has a correlation coefficient of 0.81 with FFA for Suezmax on TD20+1_M (West Africa to UK- Continent) whereas the correlation coefficient was 0.77 with FFA for Aframax on TD17+1_M (Baltic to UK-Continent).

Source: Baltic Exchange, DMFR, NYSE

The high correlation between stock prices of these companies and FFAs is mainly due to higher spot exposure of their fleet.

On the other hand, Tsakos Energy Navigation (NYSE: TNP) stock price has a low correlation coefficient of 0.16 with FFA for Suezmax on TD20+1_M (West Africa to UK-Continent) and the correlation coefficient was 0.46 with FFA for Aframax on TD17+1_M (Baltic to UK-Continent). Relatively low correlation between TNP’s stock and FFAs is mainly due to the company’s higher exposure to fixed-term charters.

Crude tanker FFA has substantially outperformed global equity markets

There is no significant correlation between crude tanker FFAs and global indices (S&P 500 and Dow Jones) contrary to the strong correlation between crude tanker FFAs and crude tanker shipping stock prices. 1_M crude tanker FFAs have surged substantially since 1 March primarily on the back of firm demand for vessels at low oil prices whereas Dow Jones and S&P 500 have registered a decline of 6.4% and 5.3% respectively over the same period. Crude tanker FFAs have also outperformed global indices in the light of strong demand for crude tankers amid uncertainty in the global oil market following the attack on Saudi Arabia’s oil facilities and strong winter demand in 2H19.

Source: Baltic Exchange, DMFR, NYSE

Shareholders to benefit from firm tanker market

Output outside OPEC+ will also decline gradually as high-cost producers such as shale oil producers in the US, sand oil in Canada, and offshore oilfields in Brazil and North Sea will find it difficult to sustain their operations at lower prices. Accordingly, crude oil oversupply will gradually narrow in 2H20 due to declining production and improving demand with gradual easing of lockdown measures in major economies. However, tanker spot rates are expected to remain elevated on account of increased demand for floating storage in addition to transportation trade as the global oil market is expected to remain oversupplied at least in 2020. Tanker companies are expected to register a record revenue growth on the back of firm freight rates and higher utilisation. Additionally, lower bunker expenses will further enhance their margins and profitability, and companies will transfer the benefits to shareholders through higher dividends, stock buybacks or debt repayments.

Product tanker shipping

Product tanker FFA rally driven by storage demand

Product tanker FFA (MRATCE+1_M) and product tanker spot rates have rallied from mid-April 2020, outperforming both product tanker share prices and global equity indices. One-month product tanker FFA (1M FFA) has gone up ~215% YTD 2020, compared with ~37% average decline in product tanker stocks in the same period. The Baltic Clean Tanker Index increased 53.8% YTD 2020. Fundamentally, both global oil demand and global refinery intake have been softer so far in 2020 than in 2019. The outbreak of COVID-19 has severely impacted oil demand growth with IEA forecasting a 6% yoy decline in global oil demand in 2020. However, product tanker FFA and product tanker spot rates have gained recently due to a sudden spurt in demand for product tankers for storage purpose and congestion at different ports.

Refined products demand adversely impacted by COVID-19

The virus outbreak has led to a sharp drop in global economic activity, adversely affecting the demand and thus prices of refined products. As many refineries are shutting down, global refinery intake has fallen 11.9% to 73.2 mbpd between December 2019 and March 2020, leading to a plunge in oil demand. The IEA expects global oil demand to decline 6% yoy in 2020 to 93.3 mbpd, impacting transportation fuel and naphtha prices.

Source: EIA, DMFR

Source: EIA, DMFR

Storage demand drives recent rally in product tanker spot rates

While COVID-19 has adversely impacted the demand for refined products, low product prices have led to the demand for clean floating storage. Gasoline prices declined ~50% during December 2019 to March 2020 whereas gasoil prices declined 47.2% during the same period. Falling refined product prices along with congestion at some ports resulted in the recent sharp increase in product tanker spot rates. TC2_37 TCE has increased 113% YTD 2020.

Note – Product tanker spot rates have been indexed as of 1 Jan 2020

Source: Baltic, DMFR

Source: DMR, DMFR

Product tanker FFA outperforms product tanker equities and global equity indices

While product taker FFA has recorded strong positive return YTD 2020, product tanker stocks and global equity indices have declined, indicating weak correlation with product tanker share prices and global equities. Product tanker stock prices overreacted to the surge in rates in late 2019 and thereafter corrected steeply in 2020 following the sharp fall in demand for refined products. For example, Ardmore stock price surged 35% in 4Q19 following the US sanctions on Cosco entities. The stock has declined 26.7% YTD 2020. Furthermore, product tanker stocks have been impacted by the global turmoil in the equity markets.

Note: Product tanker FFA rates and product tanker share prices have been indexed as of 1 Jan 2020

Source: Baltic, Respective exchanges, DMFR

Note: Product tanker FFA, Dow Jones and S&P 500 have been indexed as of 1 Jan 2020

Source: Baltic, Respective exchanges, DMFR

Note: MRATCE+1_M FFA rates and share prices since 1 Jan 2019 have been included for this exercise. MRATCE+1_M FFA rates are for cross Atlantic region for MR vessels (47,000 dwt)

Source: Baltic, respective exchanges, DMFR

Our view

We believe the returns on product tanker shares have lagged those of product tanker FFA during the last three months as product tanker share prices corrected sharply after the surge in 4Q19, but are yet to reflect the recent surge in vessel earnings. The ongoing rally in product tanker FFA was led by the demand for clean products storage, which will start declining once the global economy recovers and the demand for products normalises.

Dry bulk market

The year 2020 has been one of unprecedented events. Just when the two largest economies of the world – the US and China – were mending ties to end a two-year long war on tariffs and sanctions, the COVID-19 pandemic trumped all else, disrupting global trade and public life alike.

Shipping players braced for uncertainty and higher operating costs in 2020 due to the implementation of the IMO regulation as they had to select between scrubber installations and cleaner and costlier fuel. However, geopolitical tensions and the global pandemic led to a plunge in crude prices. But what happened to oil was not the cause, rather the effect, with the cause being crashing trade and halting businesses.

On 19 February, S&P 500 closed at an all-time high of 3378.83. However, due to the virus outbreak the index crashed 33% in terms of value in just 23 sessions, ending at 2290.71 on 23 March 2020, a level not seen since December 2016, with each major global market and sector feeling the brunt. The dry bulk shipping sector was no different with wild swings in Baltic Dry Index (BDI).

Note: 1) All the three values have been indexed to 100 on 1 April 2018. The data shown is till 10 April 2020.

2) The current month FFA for the route 5TC

Source: DMR, Baltic exchange and DMFR

The ‘well-diversified-but-skewed’ fleet of Star Bulk Carriers Corp. (NASDAQ: SBLK) is employed completely in the spot market. With about 80% of fleet capacity coming from Newcastlemaxes, Capesizes and Kamsarmaxes, it is no surprise that SBLK’s stock price moved in tandem with the large vessel spot market.

As SBLK stock exhibits high correlation with the FFA market, an analysis of its stock prices and the current month April FFA 5TC route average shows high correlation with all vessel classes that have spot market exposure.

As expected, the stock price has the highest correlation of 0.7 with the Capesize FFA. However, Handysize takes the second spot at 0.65 despite SBLK not owning a single Handysize vessel and Panamaxes take the third spot at 0.52. SBLK owns only one Panamax, which contributes less than 1% to SBLK’s fleet in terms of capacity. The Supramaxes, which happen to be the least correlated at 0.49, contribute about 8% to SBLK’s fleet in terms of capacity.

Note: 1) All the values have been indexed to 100 on 1 April 2019. The data shown is till 31 March 2020.

2) The current month FFA for the route 5TC.

Source: DMR, Baltic exchange and DMFR

SBLK’s major peer, Golden Ocean Group (GOGL) also displays similar correlation. GOGL operates a Capesize-dominated fleet as well, both in terms of quantity and capacity, having the highest correlation with the Capesizes at 0.77, followed by Handysizes at 0.74. GOGL also does not operate any Handysize vessel.

Note: 1) All the values have been indexed to 100 on 1 April 2019. The data shown is till 31 March 2020.

2) The current month FFA for the route 5TC.

Source: DMR, Baltic exchange and DMFR

Similarly, SALT which is a pure play Ultramax and Kamsarmax operator also showed a very high correlation with the Handysize FFAs at 0.84, followed by the Capesizes at 0.81. All the operators have seen their share prices highly correlated with the Handysize FFAs and Capesize FFAs, regardless of which vessel class they operate in.

Note: 1) All the values have been indexed to 100 on 1 April 2019. The data shown is till 31 March 2020.

2) The current month FFA for the route 5TC.

Source: DMR, Baltic exchange and DMFR

D/S Norden’s stock (DNORD) shows the least correlation among all operators because of its vessel class diversity in the product tanker segment. DNORD also exhibits the highest correlation of 0.37 to both Handysizes and Capesize FFAs, and only 0.13 to the Supramax FFAs and 0.23 to Panamax FFAs despite having 22.5 Supramax vessels and 17.5 Panamax vessels in a total fleet of 48 vessels.

Pacific Basin (HK: 2343) owns a fleet of 82 Handysizes and 35 Supramaxes with a correlation of 0.70 and 0.48 to the Handysize and Supramax FFAs respectively. The company has a higher correlation of 0.58 with Capesize FFAs despite having no exposure to the larger vessel classes.

Source: DMR, Baltic exchange and DMFR

Conclusion

The volatility in the dry bulk market can be gauged by the swings in spot rates and stock prices. Short-term FFAs, especially the current month FFAs, that have been considered for our analysis too exhibit a close relationship with the stock prices of the dry bulk operators. It is obvious that the correlation would be higher for pure play dry bulk operators and for operators that deploy their fleet in the spot market. However, it is interesting to see that every stock price has exhibited the highest correlation with either the Handysize FFAs or Capesize FFAs, the two extremes of the vessel classes by capacity, irrespective of the vessel class operated. Operators specialising in smaller vessel classes have shown highest correlations with Handysize FFAs followed by Capesize FFAs, while the larger vessel class operators have shown the highest correlation with Capesize FFAs followed by the Handysize FFAs. Panamax FFAs are at the third spot, followed by the Supramaxes at the fourth.

That said, with both the Capesize FFAs and Handysize FFAs signaling an upward trend towards the third and fourth quarter of 2020, this may be a pointer in the direction that the stock prices, which are trading at an average discount of 50% to the NAV, would see a comeback in 2H20.

LPG market

The first phase of the trade truce between the US and China was in January this year, which included USD 52.4bn of energy purchases. Thereafter, in March, China dropped tariffs on US LPG imports. Meanwhile, residential LPG demand in China has recovered as a result of easing restrictions from COVID-19 lockdowns. On 8 April 2020, the government lifted most transportation restrictions in Wuhan, boosting fuel demand in the city. This can boost residential LPG sales in China from about 60-70% of normal levels at the end of March to 80% by May, should the relaxations continue.

Of late, the market has witnessed a double whammy. While the demand has been hit by the COVID-19 pandemic, supply of LPG has been in excess. The oversupply situation is driven by the OPEC+ group’s initial failure to agree to a further production cut resulting in Asia- Pacific LPG prices plunging to record lows.

However, demand from India and Indonesia is supporting prices. The record OPEC+ production cut agreed on 12 April 2020 has increased expectation that Middle Eastern producers will manage supply, further boosting the US-Asia-Pacific arbitrage — which was opened up by the Indian and Indonesian demand.

Given these factors, the current month FFA contract for LPG has come down to the same levels as in April 2020, after a very strong 2019. Stock prices have shown little more volatility, largely due to the fleet employment strategy. The stock of BW LPG, the largest LPG shipping operator under our coverage, has also shown the highest correlation with the current month FFA contracts as it is has pure play VLGC fleet. As in other sectors, operators with fleet skewed towards larger vessels, have shown a higher correlation with the market.

Note: 1) All the values have been indexed to 100 on 1 April 2020.

2) BFA LPG represents current LPG FFA contract.

Source: Baltic Exchange, DMR and DMFR

Given these factors, the current month FFA contract for LPG has come down to the same levels as of last year, after a very strong year. The stock prices have shown a little more volatility, largely due to the fleet employment strategy. The stock of BW LPG, has shown the highest correlation of 0.59 with the current month FFA contracts. High correlation for BW LPG can also be attributed to a pure play VLGC fleet. As in other sectors, operators with fleet skewed towards larger capacity vessels, have shown higher correlation with the market.

On the other hand, Navigator Holdings, the second largest operator under our coverage, showed the second highest correlation to the forwards market at 0.4, followed by Stealthgas, the smallest operator at 0.33.

Source: Baltic Exchange, DMR and DMFR

Weaker prices for all contracts in 2020 reflect the impact of the pandemic and oil price war. While this differential narrows considerably in LPG + 2 Cal, i.e. the calendar year 2021, it is not due to higher route averages. This gloomy outlook would impact share prices as well, especially those of larger carriers like BWLPG.

LNG shipping

LNG shipping stocks more resilient than LNG FFA

LNG spot rates and near-term one-month LNG FFA (BLNG1+1M FFA) have seen a steep decline since the start of 2020. While the first quarter is generally sluggish for LNG shipping, the prospects were exacerbated by the outbreak of COVID-19 and the resultant global economic weakness with lower-than-expected growth in LNG imports of key countries. The number of idle LNG ships is the highest in the last one year, signaling an oversupplied market. Near-term LNG FFAs have declined more than the LNG shipping spot rates as these instruments provide direct exposure to spot LNG shipping.

COVID-19 adversely impacted LNG demand in 1Q20

China, which has been the growth driver of LNG trade for the last few years, was severely impacted by the pandemic and its LNG imports slackened in 1Q20, growing at a mere 2.2% yoy in 1Q20 compared with 20.6% yoy in 1Q19. Major Chinese LNG import companies like PetroChina and CNPC declared force majeure, followed by several Indian and European companies declaring force majeure in the wake of slumping LNG demand caused by the pandemic. While LNG imports for key LNG importing countries grew 6.6% yoy to 57.8 million tonnes in 1Q20, they fell short of our expectations, forcing us to reduce our full-year 2020 estimate of LNG trade growth to negative (-)1.3% yoy from 10.3% yoy at the start of 2020. We foresee weak LNG prospects for the remaining quarters of 2020 on account of the pandemic, glut in LNG supply, weakening LNG trade, very narrow arbitrage window and low LNG prices.

Note: In the above chart, we have included LNG imports of China, South Korea, Thailand, India, Japan and Singapore

Source: GTIS, DMR, DMFR

Note: In the above chart, we have included LNG imports of China, South Korea, Thailand, India, Japan and Singapore

Source: GTIS, DMR, DMFR

LNG vessel availability is highest since January 2019

The number of LNG vessels available for charter has gone up with the slump in LNG demand. Higher vessel availability and weak LNG trade growth have resulted in a sharp fall in LNG shipping spot rates.

Source: DMR, DMFR

Source: DMR, DMFR

High correlation of LNG FFA with LNG shipping stocks

Share prices of LNG shipping companies (except Golar LNG) exhibit high correlation with LNG FFA. We believe the correlation of Golar LNG’s share price is lower than that of its peers as the company has high exposure to other segments like power projects and FLNG.

Note: LNG FFA and share prices since 1 Jan 2020 included for this exercise. BLNG1+1M FFA rates are for Gladston-Tokyo route and for next month delivery

Source: Baltic and respective stock exchanges

Decline in 1M LNG FFA steeper than fall in LNG shipping stocks

1M LNG FFA has declined at a higher rate than the share prices of LNG shipping companies. While LNG shipping stocks have fallen 37.7% on average YTD 2020, 1M LNG FFA has plunged 58% during the same period. We believe the higher decline in 1M LNG FFA can be attributed to the abrupt fall in LNG demand due to the spread of COVID-19, but the lower decline in share prices of LNG shipping companies is due to their low spot exposure. For example, Nakilat has a majority of its LNG ships trading on long-term charter with a revenue backlog of about USD 13mn. Most of Teekay LNG ships are also on fixed charter, although the company has some LPG ships trading in the spot market as well.

Note: LNG FFA and share prices since 1 Jan 2020 have been included. BLNG1+1M rates are for Gladston-Tokyo route and for next month delivery. LNG share prices and FFA rates are indexed as of 1 Jan 2020

Source: Baltic and respective stock exchanges

Near-term LNG FFA has fallen more steeply than one-year LNG FFA

Despite the 58.0% YTD 2020 fall in 1M LNG FFA, one-year LNG FFA (BLNG1+1Cal) rates dropped only 21.3% as LNG shipping is expected to recover in 2021 with the spread of COVID-19 likely to be contained by end 2020.

Note: BLNG1+1CAL represents calendar year 2021. BLNG+1M is for next month delivery. BLNG1+1M and BLNG +1 CAL are for Gladston-Tokyo route. BLNG1+1M and BLNG1+1CAL are indexed as of 1 Jan 2020

Source: Baltic

LNG FFA rates fall steeper than global equity markets

1M LNG FFA has declined 3.4x on average compared with Dow Jones and S&P 500, suggesting a sharper decline than the share prices of LNG shipping companies. LNG FFA as an asset class is more volatile than the broader equity index like Dow Jones and S&P 500.

Source: Baltic and Respective stock exchanges, FFA and Indices data has been indexed as of 1 Jan 2020

Source: Baltic and Respective stock exchanges, FFA and Indices data has been indexed as of 1 Jan 2020

Long-term LNG fundamentals remain intact

While LNG shipping share prices and LNG FFA have declined sharply in the last few months, we believe long-term fundamentals of LNG shipping are intact due to the growing proportion of LNG in the overall energy mix. With Qatar, the world’s second largest LNG exporting country, deciding to go ahead with its expansion plans, we expect LNG trade to get back on the growth path from 2021 and project LNG trade to grow at a CAGR of 4% after 2020 when the virus is contained.

Our view

We believe LNG shipping stocks, as an asset class, have been more resilient than LNG FFA as some LNG shipping stocks have lower spot market exposure and are more diversified. As such, we prefer LNG shipping stocks over LNG FFA as a way of taking exposure to LNG shipping.

Container shipping

Among the hardest hit shipping segments is container shipping wherein consumers are losing confidence and are reluctant to spend. Container traffic is being hit by reduced discretionary spending on non-essential items as consumers look to conserve cash with jobs and livelihoods at risk.

This is a fear event; probably more akin to the 2008-09 financial crises. We believe markets will remain volatile until we see a combination of 1) evidence of successful virus containment; 2) clarity on the net economic impact; and 3) a concerted global policy response. We therefore expect the performance of carriers in 2020 to be significantly hit. Carriers are also likely to intensify practices such as void sailings in order to minimise losses, thus eroding service reliability.

That said, the development of two major container shipping stock prices (AP Moller Maersk (APMM) and Evergreen Marine) suggest their strong correlation with Drewry’s World Container Index (WCI) spot freight rates. WCI assessed by Drewry is a composite of container freight rates on eight major routes to/from the US, Europe and Asia published weekly. We selected these two stocks for our sample because of their high dependence on East-West trade.

Historical trends suggest that stock prices of both companies have aligned closely with WCI spot rates and are good indicators of stock price movement, in our view. Given that the spot rates are a barometer for future contracted rates, it is no surprise that stock prices have mostly followed a pattern similar to spot rates – an indirect proxy for future earnings. The correlation of each stock was closer to 50% over the period mentioned in the analysis.

Note: Share prices are weekly

Source: WCI Spot rates assessed by Drewry, WSJ, DMFR

Note: Share prices are weekly

Source: WCI Spot rates assessed by Drewry, WSJ, DMFR

To boost its share price, APMM, in particular, has tried various options including allocating USD 2.3bn in ordinary dividends and engaging in share buybacks since 2017. The prolonged restructuring of the group and focus on vertical integration failed to create enough value for investors. Now with the COVID-19 pandemic, its stock price has taken a battering since the beginning of the year. Maersk’s shareholders lost 37% in value in the three-month period until 31 March 2020 as the stock traded under DKK 6,000, a price seen only in 2009 at the time of the financial crises. As such the group has suspended its 2020 full-year EBITDA guidance of USD 5.5bn citing the severe impact of COVID-19 on the global economy and container market.

On the other hand, Evergreen Marine’s stock lost 26% in 1Q20, after gaining 5% in 2019. Similar to Maersk, Evergreen is aiming to deliver an “integrated container logistics solution” – a phrase consistently touted by Maersk to describe its own ambition of offering more supply chain services traditionally provided by freight forwarders. Earlier in February this year, Evergreen joined the ranks of container lines offering an online booking platform – GreenX. The platform provides shippers and forwarders instant quotes, allowing them to book space for equipment within minutes.

Meanwhile, container spot rates assessed by Drewry (WCI) have so far been better than in 2019 with the latest recorded at USD 1,446 per feu on 30 April 2020, which is up 5% yoy. With respect to spot rates on Asia-Europe trade, Shanghai-Genoa surged 9% yoy, while Shanghai-Rotterdam climbed 1% yoy. However, the biggest leap was witnessed in the spot rate on the backhaul trade of Rotterdam to Shanghai which came in at USD 967, up 79% yoy.

Despite contracting demand, spot rates have held up thus far, primarily because liner companies successfully managed capacity. Nonetheless, Drewry expects the container imbalance to have a significant impact on freight movements in 2Q20. Shipping containers started getting stuck at different ports across China from February due to declining exports triggered by the COVID-19 outbreak. Sluggishness coupled with empty sailings further restricted the movement of containers, making it difficult for carriers to ensure the availability of containers elsewhere. With most countries opting for a complete lockdown, repositioning of containers is becoming challenging for liners.

To add to the misery of liners, the containership idle fleet has risen sharply since the start of the year against the backdrop of numerous reports of scheduled service suspensions and blanked sailings. The latest data suggests that by end March about 8.2% of fleet capacity stood idle, up from around 5.1% at the beginning of January. Meanwhile, reports of additional service adjustments continue to filter through.

Does the current oil price development offer a cue to share prices?

When it comes to the relationship between oil and shipping stock prices, conventional wisdom states that the two have an inverse correlation. In other words, as oil prices rise, company valuations fall and vice versa.

The underlying assumption adopted by this view is that when oil prices rise, energy prices increase as a whole. This causes systemic inflation, thereby, increasing the operating cost of businesses, especially in a sector such as container shipping where bunker fuel price is a key determinant of profitability.

Looking at the figure below, the relationship has largely held true between both APMM and Evergreen’s share price and Brent crude oil price.

Note: Share prices are weekly

Source: DMFR, WSJ

Note: Share prices are weekly

Source: DMFR, WSJ

Separately, as the prices of ship fuel plunged to USD 149 per tonne for HFO and USD 196 per tonne for VLSFO, the price gap between the two types of fuel dropped below USD 50 per tonne.