Oil & Gas – Sailing on the rising tanker freight rates

• Russia – Ukraine crisis is reshaping the global energy trade, making the voyages longer and putting pressure on global tanker shipping market.
• We expect oil tanker freight rates to remain robust in near future due to upcoming embargo of the EU on Russia.
• We prefer PVT the most for this investment theme.

Russia – Ukraine crisis is reshaping global oil trade flows

In response to Russia-Ukraine conflicts, the EU has adopted sanctions on Russian oil. Based on the latest sanctions package, most imports of crude oil and petroleum products via the sea to the EU will be banned by the end of 2022. Thus, they have to switch to other oil supplies, particularly from the US and Middle East, sparking the reconfiguration of global oil trade flows. Indeed, Bloomberg estimates that oil volume from Middle East to Europe in July has been 90% higher than that in January. In contrast, Russia is shifting oil exports to Asian buyers like China and India.

We expect stronger tanker freight rates ahead

Demand for tankers (in form of both dirty and clean tankers) has been climbing since the EU imposed sanctions on Russia, and we expect this trend to keep increasing in coming months as the EU embargo comes into effect later this year. Notably, as a feasible alternative source for gas in electricity generation, we suppose European diesel demand to accelerate in coming months, lifting demand for clean tankers. Furthermore, the diversion of Russian oil and fuels has changed the shipping routes, making the voyages longer and putting pressure on global tanker shipping market. Citing data from Clarksons Research, the report said the two-week average profit for an oil product tanker (to August 8) had jumped to US$400,000 – the highest since 1997. Overall, we expect in stronger tanker rates in the coming times, benefiting O&G transporters.

We prefer PVT the most, followed by GSP and PVP on this investment story

For Vietnam’s O&G transportation sector, the company with high exposure on international market like PVTrans (PVT VN, ADD, TP: VND26,300) will be a key beneficiary from the global rising tanker rates. Currently, c.80% of PVT’s fleet is running in international voyages and most of them are signed in form of time charter contracts which we believe it should be renewed with higher rates in the coming times. Besides, we prefer GSP and PVP as they are also operating crude and refined products tankers in international market.

Investment risks

Potential upside risks are stronger-than-expected global oil and fuels demand and the lingering Russia – Ukraine crisis to boost tanker rates hike. Downside risk is lower-than-expected global demand due to the economy recession.

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