Opportunity in the COVID Crude Oil Contango

Published on
March 26th, 2020
17 minutes

Opportunity in the COVID Crude Oil Contango

The Expert View ·
Featuring Harris Kupperman

Published on: March 26th, 2020 • Duration: 17 minutes

What happens to the economics of oil when the global economy shuts down because of coronavirus? Harris Kupperman, CIO and president of Praetorian Capital, breaks down the chaos coronavirus has inserted into global oil markets and provides investors with an investment thesis based on the opportunity that chaos has created. In the context of the global shutdown, Kupperman reveals how the combination of the current oil futures contango, all-time highs in tanker charter rates, and the dearth of crude oil storage could lead to never-before-seen revenues and profits for the tanking companies. He walks viewers through the numbers, explains the underpinning economics of the oil markets, and provides time horizons and potential profit multiples for those looking to find opportunity through uncertain times. Released on March 26, 2020.



  • DE
    Daniel E.
    21 April 2020 @ 18:07
    Does anyone in here have an opinion on the exit strategy for the tanker stocks? I am up 20-40% on most of them.. Just want to be realistic in profit taking. Thanks for any ideas on this
    • PK
      Prafulla K.
      22 April 2020 @ 04:06
      Yea I think the best way is to look at Contango, if Contango starts to flatten and then roll towards backwardation, we rotate out of tankers. I just got into tankers, this play seems to be on the table at least till later in the year...do u think we’re done with the tanker play?
    • GS
      George S.
      23 April 2020 @ 21:08
      His view is tankers could go up 2-5x over the course of this year so have that in mind. Size appropriately.
    • JW
      J W.
      24 April 2020 @ 17:10
      In addition, Warren Pies mentioned in one of his videos that in a previous run these tanker stocks went up 65% over a roughly 1 yr period. Situation was somewhat different I am sure, but just for context.
    • JW
      J W.
      25 April 2020 @ 17:06
      He expands further on this trade on this podcast (1:12 onwards). He is pretty confident that this thing has tremendous amount of runway ahead....
    • NG
      Nelly G.
      1 May 2020 @ 13:38
      @JW2 W. Which podcast, the one on RealVision or somewhere else?
    • JW
      J W.
      11 May 2020 @ 17:24
      @koho - I obviously forgot to add the link, sorry for that..so here is a late response ;-) https://www.youtube.com/watch?v=7ZpLMWpUQPM&feature=youtu.be
  • NG
    Nelly G.
    1 May 2020 @ 13:49
    Anyone know where I can view the steepening of the contango on oil? Looking for something like vixcentral.com but for oil.
  • VB
    Vincent B.
    31 March 2020 @ 14:24
    Since the index doesn't replicate the right thing here, I am just buying a basket myself. I'd go for ones that have a large % of their assets in VLCCs and ULCCs o/w a high % should be spot charters. I've identified FRO INSW EURN DHT as the best suited. FRO - new fleet av. 4 yrs, great management, highly levered and high premium to asset value, high EV per DWT. INSW - av. 8y old fleet, trading at discount, half the leverage of FRO, good management, "cheap" valuation based on negative EPS in the past, but I think this company is gonna take-off and is very well positioned. Debt restructured and significantly reduced EURN - similar to INSW with better opearing performance and EPS figures historically, imminent debt maturities though, trading somewhere inbetween FRO and INSW DHT - trading similiar to EURN, bit more debt, pure VLCC fleet similar age as EURN (8 years), stable historic earnings Nordic American only has Suez Max's. Mila is too diversified. LPG is mainly gas. Teekay too diversified. DSSI vessels are too small. The following are too small or too diversified: Tsakos, SFL, Kawasaki Kisen, China Cosco, Scorpio. OSG too risky.
    • JV
      James V.
      6 April 2020 @ 17:06
      Thanks Vincent.
    • Av
      AAJE v.
      19 April 2020 @ 20:22
      Hi Vincent, would you happen to know if your recommendations have time chartered their fleet out? To profit from the current rates they would need spot exposure.
    • VB
      Vincent B.
      26 April 2020 @ 18:23
      The four recommendations run a mix of timed/spot charters, although the majority of their ships run on spot. Valuations have changed a bit by now, as these things are bloody volatile. Some of the other stocks may do very well or better but I think the four i mentioned are serious companies with managable debt and good management teams I am confortable with.
  • ar
    aravind r.
    3 April 2020 @ 21:53
    Can someone play the devils advocate and explain what is the worst case scenario for this trade?
    • ID
      Igor D.
      9 April 2020 @ 01:34
      The less likely thesis killer: 1. War in the Arabian Gulf. The more likely thesis killer 2. Gambler management teams decide to waste money by ordering new vessels. 3. Gambler management teams decide to waste money on "synergistic" acquisitions outside of their core sector (clean buying dirty, dirty buying clean, either buying drybulk, LNG, any stupid combination). My opinion is that even the deepest oil production cuts won't be severe enough to prevent there being a stunning Q1 and Q2, even a great Q3 for tankers.
  • TC
    Tim C.
    8 April 2020 @ 14:30
    Answer: 8 stocks - EURO, TNK, FRO, NAT, DHT, INSW, STNG, DSSI April 6 well worth the read: https://seekingalpha.com/article/4336308-nordic-american-tankers-limited-first-half-of-2020-will-be-blowout
  • TC
    Tim C.
    6 April 2020 @ 01:47
    After much time and research, I'm a reluctant convert. Two solid observations: 1) Oil demand has plummeted at previously inconceivable levels; likely lower by 10-20 million bbd for at least 2-3 more months by everyone's accounts. Then, demand doesn't come back to 2019 levels for at LEAST 1 year 2) Joe public doesn't understand that SUPPLY cannot suddenly switch to match lower demand numbers. Too much inertia. Corps have hedged millions of barrels at $50+ and so will happily keep churning it out. Cash strapped corps will take $10/barrel rather than zero cash flow and breach debt covenants; sovereigns still need to pump to keep economies running and populace placated. Expect plenty of tweets and headlines that attempt to raise oil $. No doubt, MBS and Putin will quickly say they'll reduce supply. It'll work for a week or 2. But they can't do it hard, or fast, enough. Only: which stocks to put in your 'basket'?
  • MH
    Michael H.
    5 April 2020 @ 13:31
    This guy is extremely arrogant. Really enjoyed his perspective on covid re not being conducive to playing golf, flying private jet
  • KK
    KeQiu K.
    2 April 2020 @ 15:34
    Has your view on this trade changed after the announced production cuts from Russia and Saudia Arabia?
    • PT
      Pascal T.
      3 April 2020 @ 13:21
      The markets view has certainly changed, Tanker stocks are down across the board. My view is that nothing has changed yet until Mondays OPEC+ telco. Even before Trump went on air with his speculations it must have been clear that the current output is not sustainable and OPEC+ will discuss eventually. If more of the people here are in this trade and want to share their view we can do this in a dedicated Whatsapp group I just created: https://chat.whatsapp.com/JR12SR9ZgkrCo9iVNuOx9e
  • GB
    Gold B.
    29 March 2020 @ 03:51
    waiting for the market selloff to go into these.
    • dg
      daniel g.
      30 March 2020 @ 00:46
    • FF
      Frederic F.
      30 March 2020 @ 21:52
      market selloff already happened.
    • JR
      Jonathan R.
      2 April 2020 @ 17:53
      today maybe
  • SP
    Stephane P.
    26 March 2020 @ 15:26
    Just wondering, did the solution for complaints that video take too much time to get release, is just removing the filmed date ? Could we know when this was filmed ?
    • SP
      Stephane P.
      26 March 2020 @ 15:27
      BTY, very good video ;-)
    • MR
      Milton R. | Founder
      26 March 2020 @ 16:04
      Hey Stephane, I'll copy my comment from a previous video. We understand that film date is important to you, but we removed it because it was becoming a way to ignore or diminish the substance of the video without actually addressing what about it was out of date. If something has changed and a specific takeaway is no longer valid please express this in the comments, but saying "5 days old!" is not a substantial enough argument. We are getting content out faster than ever now, and whether the piece was filmed a week ago or yesterday it is the ideas are the important part. We want to highlight those over everything. If we feel a piece of content is entirely stale or potentially misleading, whether it was filmed yesterday or 2 weeks ago, we will not publish it. That is the main responsibility of the editorial team. Our general rules are 1) that there is almost always insight to be had because our guests are looking out more than a few days and 2) our viewers will always appreciate more perspectives, even if a few things have changed since filming.
    • ag
      alan g.
      26 March 2020 @ 16:36
      I agree, great content but with things moving rapidly, these videos are constantly out off date.
    • JG
      John G.
      26 March 2020 @ 16:57
      Milton- I think your point regarding inclusion of valid content- regardless of film date is valid. However, all commentary is in the context of current events- and making it hard to place the commentary against the specific backdrop of current events- given the rapidly changing environment- places the users of that content at a disadvantage in terms of our ability to interpret the advice and apply it. Please include the film date so we are able to apply that context.
    • MR
      Milton R. | Founder
      26 March 2020 @ 18:10
      Alan and John, all the interviews filmed via Skype are done within the last 4-5 days. There is a bit of scheduling done because we want to cover all days of the week.
    • JP
      John P.
      26 March 2020 @ 23:58
      I'd like to know when they were filmed as well. It's unfortunate people are getting so unnecessarily irritated in the comment section. It's as if they want RV to be CNBC and also hand hold through every single trade. The complete opposite of what this platform was created for.
    • AW
      Aaron W.
      27 March 2020 @ 04:05
      Keep the filmed on date.
    • CR
      Christopher R.
      27 March 2020 @ 05:46
      I think more information which may provide context than taking away information which might be taken wrongly will be a net benefit.
    • MR
      Milton R. | Founder
      27 March 2020 @ 09:05
      We'll consider all the comments received so far. Maybe this was just a test to show the film date is necessary no matter what.
    • JL
      J L.
      27 March 2020 @ 09:20
      just dont say anything else and put the date back on
    • SB
      Salvatore B.
      29 March 2020 @ 15:43
      Transparency should be a primary concern. There will always be people who complain about the film date, just like right now people are complaining about NOT knowing the date. The date would be available and we should all be able to decide what to do with that information. Personally, I always look at the film date out of curiosity. It provides much needed context to what is said during the videos. Things are changing very quickly in these markets, and it is helpful to know that something was said 2 days ago or 8 days ago in an interview.
    • SM
      Shivani M.
      31 March 2020 @ 21:32
      I agree, add the date. But subscribers, know that editing a video is very time-consuming, unless you want the interviews to be 30-40% longer (unedited), which (trust me) you don't. This is an 18-24 month trade. Still valid. Nothing to complain about, really.
  • MC
    Melvin C.
    26 March 2020 @ 09:49
    Dry bulk rates have plummeted due to the Covid-19's impact on trade. If prolonged quarantine is not priced in, dry bulk rates would decrease further as demand is further contained. Unfortunately non-oil shipping was not covered in this video. Is this a threat to the investment thesis?
    • JV
      Jan V.
      31 March 2020 @ 19:37
      Bulk shipping and tankers (crude/clean) are very different segments of the shipping market. Not correlated.
  • AE
    Akraf E.
    27 March 2020 @ 11:34
    According to this article written 20th March, the oil price is not quite low enough to make this work yet: “We’ve heard numbers of $18 - $25m…to charter a VLCC for one year,” and then added: “That would equate to $9 per barrel to $12 per barrel on a 2m barrel VLCC…the current contango curve on Brent oil, is around $10 per barrale on a 12 month basis.” What this means is that the lines are only beginning to cross; floating storage is on the cusp of becoming economical. https://www.seatrade-maritime.com/tankers/oil-prices-vlccs-and-floating-storage
    • BT
      Bryan T.
      28 March 2020 @ 23:52
      Interesting...have you looked at the price of tanker stocks lately? The handful I'm in are up 27% on average in the last week. Kinda looks like its working.
    • dg
      daniel g.
      30 March 2020 @ 00:47
      @bryan T it's just the rising tide of all risk asets on the backs of fed BS
    • yg
      yann g.
      30 March 2020 @ 10:10
      Contango steepened quite a bit since then!
    • AJ
      Andrew J.
      30 March 2020 @ 16:53
      Bryan T or anyone else that's in at the moment.. I am in on the top 6 oil tankers. All up between 10 - 24% currently.. when are you thinking of selling?
    • pa
      paolo a.
      30 March 2020 @ 19:41
      This call was really spot on! I mean, terrific. This guy is a genius!
    • JV
      Jan V.
      31 March 2020 @ 19:27
      What kind of VLCC exactly? There is a big difference between a new ecovessel with scrubbers and uneconomical vessel of 20 years old. OPEX is close to zero for storage. A 20 year old vessel is about worth $20 - $25m. Why would tanker companies demand such high rates for a ship that is ready to scrap?
  • KF
    Kenneth F.
    30 March 2020 @ 23:55
    OSG FRO STNG TK TKG. Any one have a ranking of these ?
  • TT
    Terry T.
    30 March 2020 @ 17:08
    Phenomenal interview with incredible points and observations by both. I do wish I had a better grasp on the probabilities of deflation or inflation.
  • GS
    Gunnar S.
    30 March 2020 @ 14:39
    This is crazy.. eg SAGA Tankers has a estimated P/E at 0,14 and P/B at 0,64 atm....,
  • GD
    Gianluca D.
    30 March 2020 @ 00:58
    I don't think Vitol and Glencore will give away all the contango trade for two reasons: 1. they own their own fleet and 2 the way it works you pay a storage fee to hold crude in the vessel. Other cost he didnt talk about is the cost of holding the oil. You need Balance sheet, difference is that this time compared to 2008, apart from Macquarie no other bank will hold oil on the water. So financing is going to be a big deal here, Vitol and Glencore and not going to hold oil on the water just using their own equity - unless they can make over 20% which is their internal cost of fund (for equity usage).
  • DR
    Derrick R.
    29 March 2020 @ 17:11
    BDRY is dry shipping. What basket is he talking about for oil? Or is he thinking that old dry shipping boats can somehow be repurposed quickly to store oil? Confused.
    • dg
      daniel g.
      30 March 2020 @ 00:46
      good question
  • CH
    Connor H.
    26 March 2020 @ 21:15
    BDRY chart shown. It is an ETF with a portfolio of dry bulk freight futures. Its price has tanked (pun intended). How is this at all related to companies who lease their tankers for oil storage?
    • JL
      James L.
      27 March 2020 @ 04:52
      BDRY will contain shipping companies moving commodities, not oil, and there is very little demand for those right now. But oil tanker stocks have also sold off with the rest of the equity market, and that's his point I think, that right now everything is sold off, but there are opportunities in things that may be underpriced.
    • DR
      Derrick R.
      29 March 2020 @ 17:12
      @Connor Seconded
  • DW
    Daniel W.
    27 March 2020 @ 06:33
    Teekay Tankers (TNK)
    • SC
      Sean C.
      28 March 2020 @ 15:58
      Mostly LNG and LPG https://www.teekay.com/about-us/fleet/
  • AM
    Alexander M.
    28 March 2020 @ 13:29
    Love this guy's chutzpah. Very entertaining guest.
  • CL
    Claudio L.
    28 March 2020 @ 13:01
    It is just funny to hear that: How will US shale oil producers be impacted?...Right??? We can print money in America--........and we end up just gaining market share. But that's a long process. They'll send my tankers to Pluto.
  • CH
    Christoph H.
    26 March 2020 @ 10:29
    My selection of VLCC play stocks for now: DSSI, INSW, EURN Indirect: DHT If you have any better ideas to add on diversification, please add them :)
    • Av
      AAJE v.
      26 March 2020 @ 14:00
    • AE
      Akraf E.
      26 March 2020 @ 14:26
      Any reason for picking these other than them having fleets? LPG, STNG, TNK. I haven’t inspected them deeply but Harris has mentioned these before.
    • Av
      AAJE v.
      26 March 2020 @ 15:25
      LPG's main fleet are gas tankers, not oil tankers. Scorpio could be a decent play when you're comfortable with the level of debt on their balance sheet. TNK is another good name but have a very diversified fleet. If you like the thesis you should be looking for owners with a big fleet of dirty tankers (Afra/Suez/VLCC tankers).
    • AE
      Akraf E.
      26 March 2020 @ 18:22
      @AAJE Having looked at the various fleets I see what you mean. Also FRO does have huge capacity. Is there a typical timing for the contracts on these tankers to be locked in e.g. per month, per quarter? Apart from fleet composition the other question would be how much allocatable stock will these companies have available in a month or so when the tanker supply crunches.
    • CH
      Connor H.
      26 March 2020 @ 21:18
      Thank you; not easy to find after a couple web searches.
    • ID
      Igor D.
      27 March 2020 @ 03:06
      Love Kuppy but disagree with his basket approach. I am going very concentrated. Look for sleazy and opportunistic owners who have a history of insider buying, cutting wild deals, and generally trying to screw over creditors. This isn’t Disney. This is shipping. These are B- management teams across the board in what is a highly cyclical industry. I’m concentrating bets and my clean and dirty choices are STNG and FRO, respectively.
    • ST
      Simon T.
      27 March 2020 @ 10:15
      Which of the two FRO you suggest ?
    • ID
      Igor D.
      28 March 2020 @ 04:36
      Frontline US is what I have
  • ST
    Simon T.
    27 March 2020 @ 10:15
    Truly excellent 17 minutes - thanks a lot
  • DH
    Daniel H.
    27 March 2020 @ 03:04
    I wish he had talked about the price of oil from here, not just storage problems. But the inference would be oil should fall in price.
  • AE
    Akraf E.
    26 March 2020 @ 13:08
    I wonder does anyone know if chemical tankers could be pressed into service to store oil when the fees go sky high? A quick google reveals that the differences between oil and chemical tankers are not too huge but I’m ignorant of the requirements really. They wouldn’t need to be actually transporting the oil so a country like Russia could ease regulatory requirements to get the job done. Aren’t they under pressure to avoid having to close their pipeline? Converting sounds a bit extreme but from what I can see it can be done and amazing things happen when there are hundreds of millions to be made, so I expect this could act as a longer term ceiling on the fees.
    • ID
      Igor D.
      27 March 2020 @ 03:01
      Yes. Google around dirty vs clean tankers. Dirty hold crude. Clean hold petroleum products. Clean are also smaller in capacity. Absolutely fleet owners switch around between running vessels clean and dirty in different price environments.
  • DM
    Douglas M.
    27 March 2020 @ 02:30
    I like the way this guy talks and thinks.
  • km
    kristopher m.
    27 March 2020 @ 01:27
    loved it.
  • AH
    Amir H.
    26 March 2020 @ 15:01
    Great interview, but the guest is missing lots of items such as VLCC's being locked in prior to the rate surge, billing in ton-miles not in tons. https://www.hellenicshippingnews.com/crude-tanker-stocks-plunge-as-rates-hit-record-highs/
    • CH
      Connor H.
      26 March 2020 @ 21:17
      good point!
  • AH
    Andrew H.
    26 March 2020 @ 20:12
    I find this thesis amazingly compelling. Not sure that it is right, but highly interesting. I had previously moved some money into tankers, continued moving into more today.
  • GC
    Gavin C.
    26 March 2020 @ 19:13
    Im enjoying all the recent oil views. More please!
  • SC
    Sean C.
    26 March 2020 @ 18:18
    If peak surplus is in 150 days time, and we're going to awash in 2 Billion barrels of oil, wouldn't selling Oct Crude at $32 be a better trade?
  • JL
    Jonathan L.
    26 March 2020 @ 08:16
    Why BDRY? Dry bulk isn't the same as oil... are there any oil tanker ETFs?
    • TM
      The-First-James M.
      26 March 2020 @ 16:30
  • BD
    Ben D.
    26 March 2020 @ 07:28
    Harris is right about the tanker market. What I'm interested in now with tankers is how the High Sulphur Fuel costs are going to be impacted vs the Very Low Sulphur fuel for tankers going forward. Whether refineries will change production once the economies come back online collapsing spread or not. (Im long a few Tanker companies because I just cant get over the comps and return while everything is in a bear market)
    • Av
      AAJE v.
      26 March 2020 @ 15:22
      My 2ct is that at current low oil prices the difference between HSFO and ULSFO (MGO) is not going to be material in the current tanker market. Many VLCCs have scrubbers fitted and made good money hedging the spreads ahead of the collapse. The thesis is build on a tight tanker market on the back of floating storage. These vessels use very little bunkers floating around...
  • AH
    Amir H.
    26 March 2020 @ 15:01
    Great interview, but the guest is missing lots of items such as VLCC's being locked in prior to the rate surge, billing in ton-miles not in tons. https://www.hellenicshippingnews.com/crude-tanker-stocks-plunge-as-rates-hit-record-highs/
  • jR
    james R.
    26 March 2020 @ 14:56
    Kuppy always a great interview.
  • MM
    M. M.
    26 March 2020 @ 14:40
  • AE
    Akraf E.
    26 March 2020 @ 13:09
    Oh yes and of course due to the slowdown, there should be surplus supply of empty chemical tankers.
  • MB
    Michael B.
    26 March 2020 @ 10:56
    More Kuppy! Always more Kuppy.
  • JD
    James D.
    26 March 2020 @ 09:02
    More from Harris please! Not only does the oil sector not get enough exclusive focus on RV (I know there is a lot to cover these days!), but he's good old fashioned entertaining and charismatic.
  • EP
    Elias P.
    26 March 2020 @ 07:44
    Great presentation, but you've used a chart of dry bulk shipping (13:40) which has no relation to the tanker market.