As we got closer to the end of the quarter, we saw the beginning of a fight between Saudi Arabia and Russia regarding cuts to oil production. With no agreement in place, both countries decided to fight each other and announced substantial production increases to incredible levels.
While not openly stated, we believe the objective was to destroy the U.S. shale industry by pushing the price of oil to such distressed levels where it would be clearly uneconomical for U.S. competitors to produce. The global shutdown to thwart the spread of COVID-19 then caused the price of oil to implode. With record levels of oil being produced, the demand for oil rapidly waning and limited onshore storage capacity filling up quickly, there was no place to store the excess oil.
The only viable solution was to charter oil tankers for floating storage, which led to tanker rates surging to unprecedented levels. For the crude tankers (i.e. Frontline, which the Fund also owns), charter rates for very large crude carrier vessels increased substantially from around $20,000 per day to over $300,000 per day virtually overnight before backing off a bit.
Charter rates are now still over $150,000 per day. In the near 13 | P a g e term, we believe Scorpio Tankers will continue to benefit from the current situation, as the recent OPEC+ deal to reduce production by 10 million barrels per day will not be enough to offset the current oversupply. The bottom line is that, in spite of the COVID-19 pandemic, the tanker industry continues to benefit from a record 20-year low order book for new vessels, favorable International Maritime Organization regulatory changes, Saudi Arabia/Russia conflicts that are collectively creating a situation that is extremely compelling and unique for the industry