Scorpio Tankers generates largest quarterly profit in company history

Product carrier Scorpio Tankers' third-quarters results announced record earnings, boosted by product displacement and increasing ton-mile demand.

Global refinery product inventories remain at historic lows as demand remains on the rise, according to the company. US crude oil (including Strategic Petroleum Reserves) and oil product inventories sit at historic lows around 1.2 million barrels, according to the company presentation, while demand for seaborne refined products is expected to increase as regional imbalances continue to affect ton miles.

The company's estimates showcase a 1.1 million b/d displacement of diesel for each of the European and South American continents, as well as the Caribbean region for the year 2023 as the ongoing Russian-Ukraine situation continues to hamper supply balances, globally.

Ton Mile Demand expected to increase

With international markets reflecting more efficiency and the persisting diesel shortage, company executives expect to move more product to alleviate market dislocations. Every replacement scenario should increase ton miles, as supply from India, Africa, and the Arab Gulf region vies to to compete with the US, according to Scorpio.

S&P Global Commodity Insights forecasts Middle East oil product net exports to increase by 21%, or 2.48 million b/d in Q4 2022, according to the October 2022 Middle East Oil Market Forecast. Scorpio expects ton-mile demand to increase by 7.5% from 2021 at 3.325 billion ton miles, and estimates a 7.4% increase to 3.592 billion ton miles for 2023.

Quarterly Time Charter Equivalent earnings for the company's medium range tanker pool rose 15% in Q3 to $41,143/d, according to Cameron Mackey, Scorpio's Chief Operating Officer. The rise comes despite oscillations between $30,000-60,000/d -- even during seasonal refinery maintenance -- and freight volatility, especially for the Americas clean tanker markets.

Bunkering costs, normal inflation costs, travel, and fuel expenses were "more than offset by the rise in revenues," Mackey said.

Time-charter relets to potentially increase

The majority of Scorpio's fleet operates overwhelmingly in the spot market, with a 10:90 ratio of time chartered to spot market balance overall, according to James Doyle, Scorpio's Head of Corporate Development and International Relations.

"Our customers expect market conditions to be sustained," Chief Executive Officer and Director Emanuele Lauro, said. "This is evident in time charter rates and activity, not only the rates at which customers are willing to commit are higher but importantly also the periods at which they are willing to commit is longer."

Doyle said Scorpio expects to offer 85-90% of its total fleet into the spot market in 2023, less than the 90% currently offered, as the company looks to "add two to three charters every few months."

Russian price cap

With the upcoming price cap for Russian barrels expected to go into effect on Feb. 5, concerns of further disruptions were expressed on the earnings call.

Scorpio executives were asked if the company expects customers reluctant to employ Medium Range tankers older than 15 years, given expectations of a tighter tanker market in 2023.

But Robert Bugbee, President and Director, said he did not see European or American oil majors changing their behaviors.

"They're not going to try and save themselves a few dollars by taking an older vessel and going against their own environmental policies," Bugbee said. "But on the margin, if rates go to high levels, then people are going to scramble to do whatever they can do."

Scorpio has 39 Long Range 2 tankers, 60 Medium Range tankers, and 14 Handymax tankers operational.