Note: This report was originally published on March 29th on Value Investor's Edge, a Seeking Alpha subscription service. Nothing has been changed from the original version.

As I write, the US has just overtaken China for the most reported cases of Coronavirus. Several US states are on lockdown, and here in California, we are preparing for an indefinite period of time.

Medium-term economic activity will suffer and a short-term global contraction has already hit with potentially long-term consequences for the world at large.

Adding to this is the crude oil price shock which threatens to halt production across the globe for all but the most efficient producers or state sponsored entities.

However, if there is a bright spot in all of this, it is that certain areas of shipping have remained strong, particularly crude tankers, product tankers, and LPG vessels. My top picks for 2020, by the way.

An even brighter spot, for the risk takers among us, might be the massive disconnect between stock prices and the reality of ongoing operating revenues for companies participating in these segments.

Let's talk about the current obvious winners and what everyone wants to discuss - crude tankers.

First, we had a structurally improving market since the spring/summer of 2018, which has been largely responsible for raising the rate floor.

Geopolitical events such as attacks on tankers, sanctions, crude price wars have kept us bouncing off that floor in dramatic fashion.

Below are two-year charts for the three main classes of crude tankers.

Source: Data Courtesy of VesselsValue

Notice that upward slope to the rate floor since the 2018 bottom. This has been most pronounced in the smaller classes, which have less demand elasticity, as opposed to the larger VLCC class.

Speaking of the VLCC class, notice the drop in rates during the Coronavirus-induced lockdown in China. This is because approximately 75% of crude imports are carried on VLCCs, obviously leading to a disproportionate impact on this class. So it was a double whammy for that class with regard to demand elasticity and a key customer shutting down. Surprisingly, and speaking to the overall health of the current market, TCE rates only dipped into the four-digit range for a very brief period during this time before rebounding. Two years ago negative rates would have been assured during a situation like this.

Seasonal fluctuations will likely still apply, with preparations for summer driving season and winter heating season bringing increased demand and the corresponding expected low points following those preparations. In that respect the market is functioning.

But external shocks have defined the game recently. Tanker attacks started it all. Sanctions exacerbated the situation. Now, a sudden oil price shock has led to demand for crude tankers in a couple different ways.

First, demand for crude will increase as opportunistic stockpiling commences.

This relationship leads to greater demand for crude tankers thereby raising rates, evidenced by the chart above. The greater the price shock, the larger the corresponding move. This one will likely therefore be significant.

Second is the impact of crude contango on crude tanker demand as land storage becomes scarce.

For more on this, we turn to an excellent interview with VIE member AdventuresInCapitalism who updates his followers here.

That pseudonym belongs to Harris Kupperman, CIO and president of Praetorian Capital. The link below will take you to his must watch interview regarding the current state of crude tankers.

Video Interview with Harris Kupperman

Here he describes the dynamics of the oil markets, what contango is and why it will impact crude tankers, and how the markets will respond over the medium to long run.

After watching that video, we can now discuss the first part in our forecast for crude tankers. The near term will likely be supported through storage demand either through opportunistic stockpiling on land or through profitable contango trades utilizing floating storage.

On to part two or the transitional phase. Yes, demand destruction is a real thing now. But after this indefinite lockdown, we will see trade normalization with regard to crude demand which will provide support for a market as the contango trade fades and land-based storage is filled. Rates could get choppy here, but the floor should hold.

Finally, our third stage will see complete global normalization being met with the structural realities of the crude tanker market. In short, as things get back to normal, and the inelastic nature of crude demand which is linked to economic activity begins to return to normal as well, the still improving supply/demand balance which is projected through 2022 should continue to lead to a tighter market. This continues to favor that upward sloping rate floor with higher seasonal rates and more pronounced positive reactions to external shocks while insulating against negative ones.

Some speculate there might even be a bit of pent-up demand unleashed furthering the market at this point, but I do not subscribe to that notion. As I no longer hold a V-shaped recovery is likely, any pent-up demand will likely be met with a slow return to normal in several areas which are crude input intensive (airlines, cruise ships, car travel to holiday, etc.). So pent up demand may exist, but it will only mitigate, not negate, this impact from this slow return. So, yes, I am taking seemingly bearish pieces of the puzzle into consideration here.

Others may wonder about SA overwhelming the market with crude and how that will impact cargo miles. Yes, it will impact the market. But what will also impact the market is the US/China Phase 1 trade deal, which is not forgotten by any means. In fact, it should start kicking into gear right about now.

I maintain that crude will be a major part of meeting the base energy purchase criteria (an additional $52 billion over two years) and therefore the US to China long-haul crude trade which stalled during the trade war will reignite just as SA displaces other US long-haul routes. They will offset but to what degree I am uncertain, as that will have much to do on how much the US can maintain output given these low prices.

Update on Friday March 27 from Clarksons - VLCC tanker Serifos (Ex: Bright Harmony) 309,774 DWT Tanker Built 2009 (In Service) - Reported voyage charter by BP from USG to CHINA with a CRUDE cargo of 270,000t at 15,500,000 USD on 26 March 2020.

The first of hopefully many.

As supply-side movements have had the most pronounced impact on tanker fortunes historically, it's good to review just how thin these current orderbooks are and the lack of newbuilds being contracted.

Source: Data Courtesy of VesselsValue - Chart by VIE

Estimates for 2020 will likely be revised downward with regard to delivered vessels as construction delays in Chinese shipyards were reported throughout the country. However, it appears S. Korean and Japanese yards fared much better. What could help mitigate high degrees of slippage though is a recent set of cancellations for scrubber retrofits as owners take advantage of this high charter rate environment. Many of these retrofits were to take place in China.

With 2019's high deliveries behind them, the VLCC class has an exceptionally promising orderbook at just 8%. Long build times for vessels provide a great deal of forward visibility, and given the lack of contracting lately, we can almost assume a favorable setup through 2022.

In fact, lack of contracting is an understatement.

Orders, especially for the capital intensive VLCC class, have fallen off a cliff in Q1. This could be for a variety of reasons, too many to list actually, which is why this might not be an anomaly. Obviously, the more orders remain subdued now the greater the potential of a bull market down the road.

In summary: The short-term bull market will find support in storage and contango, medium a return to normalization where a structurally improving tanker market should provide for a upward sloping charter rate floor which could be tested, and finally a full return to normal where the VLCC market should see very acceptable rates without the aid of external shocks. Finally, the possibility for continued low newbuild orders paving the way for a supply driven bull run a couple years out.

My last public report was on product tankers, so let's not dwell too much here.

Much like their crude tanker cousins, product tankers will be seeing some increased activity from this low crude price environment. Product storage will increase as long as production surpasses consumption and/or margins remain acceptable.

Beyond that, opportunities for contango exist here as well with my eyes on jet fuel which has lately seen a widening between the front and back months.

So, about those acceptable margins - Both gasoline and jet fuel margins have plunged to their lowest levels in more than a decade.

Gasoline crack spreads were already in freefall for six weeks before SA and Russia rocked the market.

Negative crack spreads mean that refineries are operating at a loss, signaling to refiners to start cutting gasoline and jet fuel output. Of course, all this plays into longer-term availability of these products and therefore the contango play.

So, ideally, while the product glut and therefore storage potential are curbed, the contango play begins to gain momentum to fill the void.

A couple quick notes: During the last oil price crash product tankers saw 2015 cargo mile demand grow by 7.4% over the previous year. During the great recession, product tankers were the only segment to maintain (even grow) cargo mile demand on an annual basis.

Short-term bumps will be seen as the US and Latin America brace for the Coronavirus shutdown, leading to demand destruction in those regions. That weakness could be hidden by this storage effort and contango play.

A structurally improving environment since the spring/summer of 2018 will again provide for an upward sloping rate floor.

The supply outlook remains favorable and newbuild contracts have been kept in check.

In short, the approximate 2% net fleet growth I forecast for 2020 will likely be dwarfed by cargo mile demand gains well above that leading to a tighter market.

One of the hardest hit segments - but at the onset of the crisis thought to be the one segment with the largest chance of a snap back rally due to pent-up consumer demand.

However, that notion of pent-up demand existed only with the security of employment.

That has now gone out the window with mass layoffs and no real idea as to when many of these millions will find new jobs.

If anything the situation for container shipping just became worse over the medium to long run as consumers across the globe as a whole will have less to spend as their confidence slides. Consumer confidence is just now responding to the current situation, but nowhere near 2008 levels. Given the economic impact we are set to endure, it will get worse and they will hunker down further.

This isn't to say container shipping is a complete avoid. No, just be realistic about why rates will likely pull back among classes that have witnessed relatively smooth sailing as of late.

Further be realistic in this bifurcated market about why I will slap an even bigger avoid on larger vessels as their niche trade lane will be decimated.

First, let's get that out of the way for any Euro or Asia focused investors wondering about who has the biggest presence in these troubled classes.

ULCVs are almost exclusively utilized on the Asia to Europe route. In my humble estimation Europe appears to be in a less-than-ideal position to recover from this shock in a timely manner. The already anemic growth on this trade lane will slow down further over the medium to long run leading to an even greater than projected supply/demand imbalance, prolonging the bear market for these vessels.

One thing over the past few years providing a lifeline to the ULCV class was forced cascading of smaller vessels as they were pushed out. But the limit to that was reached mid-2019. We know that because up till that point cargo mile demand for ULCVs was growing faster than the trade lane they occupied, indicating they were gaining at others' expense. But that stopped. Then came this next trend showing ULCV vessels "Not Underway" growing at a fast clip.

Compare that to their smaller mid-sized counterparts, the Post-Panamax class.

Notice the Post-Panamax class is not seeing nearly as much idling and fleet growth has been relatively flat since 2016.

The structural fallout is upon the ULCV class with no cascading and too young a fleet to hope for retirements just as demand is set to slow further.

However, the medium to smaller classes which can trade across a variety or routes and have a much better supply side outlook are far better insulated for this sort of situation.

But make no mistake, containers are going to take a hit here and it has started. Even as factories in China come back to life, it could be several weeks before cargo numbers pick up. Meantime, the widespread movement restrictions across the U.S. are likely to reduce orders for goods manufactured in Asia, extending the slowdown in cargo traffic.

Total Container Trade - Source: VesselsValue

We are already down 6.27% in cargo miles YTD compared to last year. Remember, the beginning of last year saw tariffs impacting trade making it a low bar with which to start.

With developed consumer economies now being the focus of the lockdown, the resulting demand destruction ripple will make its way through the supply chain.

The structural fallout, unemployment and such will ensure this will be a long and drawn-out process as the labor market (along with other macro movers) often takes weeks or even months to adjust to major moves.

My Strategy: Avoid larger containers. Waiting on common for mid to smaller container focused companies to possibly pick up the pieces. But well-covered, double-digit yields in preferred offerings are tempting.

We already had a bearish outlook heading into this year, but the economic shock brought on by the global lockdown will seal that deal for 2020.

First off, soaring finished and semi-finished steel inventories held by Chinese steelmakers, which tripled on the year and S&P Global Platts estimates could hit 100 million mt by end March, are set to put the market under immense pressure in April and May.

It will be a Herculean task for end-user demand in April or even May to recover to the 2019 average and reduce steel inventories. Government stimulus packages, no matter how strong, are only workable when people can work and move in large numbers, which is impossible while the coronavirus pandemic continues to spur lockdowns across the world.

Hopes for stimuli out of China are high, but as Platts notes, "China has pledged to boost 'new infrastructure' in 2020 to cushion the economic slowdown, but 5G, big data, artificial intelligence, new energy vehicle charging piles and intercity rail transit will consume far less steel than traditional infrastructure projects like airports, highways and railways."

In short, Chinese seaborne iron ore demand will continue to face challenges and year end totals will likely continue to tumble away from their peak.

Natural gas prices have tumbled making the gas to coal switch an easy target for authorities wanting to take action with regard to social improvement without increasing the economic burden of the working class.

This combination will likely see both coking and thermal coal volumes take a hit.

Remember, in 2019 we had the Vale dam collapse which altered trade flows in Q1 much to the downside. YTD we now find ourselves down 7.5% from those dismal 2019 levels in terms of capesize cargo mile demand.

This comes as the capesize class was expected to register 6.4% fleet growth.

Perhaps the only area to watch will be the mid-sized dry bulk vessels to see how Phase 1 is really playing out with regard to the US corn and soy harvest in October and November.

LNG has been hit hard. First, another warmer-than-average winter in Asia has reduced demand for natural gas in this key demand epicenter. This elastic demand side component always presents a wildcard.

Second, industry and manufacturing are the other large users of natural gas in that region. With the latest shutdown of those economies demand was again hit.

Yes, this sounds horribly bad, but the fact is rates are holding up exceptionally well through all this.

The week of March 22 produced rates on average of $53,500 which shockingly is above last year's point of comparison (week of March 24) of $48,500.

So, the reason behind this is long and complicated, but I will do my best to sum it up. A vast majority of LNG cargoes are locked in due to long-term contracts. Believe me, if buyers could cancel these contracts right now many of them absolutely would, but they can't. So as these contracts are fulfilled we're seeing downward pressure on prices, original buyers reselling cargoes, sellers offloading any excess cargoes in the spot market as a result of force majeure declarations or DQT (downward quantity tolerance) contract clauses, and even opportunistic purchases.

Need proof of those purchases at a time like this? Reuters reported on March 27:

Total LNG deliveries to Europe are expected to reach nearly 11 million metric tons, a 14% hike from the previous record set in December, according to IHS Markit, which said the supply push comes as gas demand is collapsing at double digit rates.

So what is this doing to cargo miles? Well, though rates might not show it, we have been posting massive gains.

Source: Special Thanks To VesselsValue!!!

The completed columns at the top show Q1 percentage gains in cargo miles over previous years for large LNG vessels (with minor projections for 2020). On the left is Q1 2019 and on the right is Q1 2020. Metrics include the trailing 12 months, year to date, quarter to date, and month to date.

The bottom right shows the supply demand picture and the blue line represents cargo miles which continues to grow in a healthy fashion in spite of all this market turmoil.

After explaining it, I think the charts speak for themselves.

What happens when the market returns to normal? "We're seeing more sell tenders these days due to a combination of factors like coronavirus and DQT, but this also means that when demand rebounds, buyers will return to the market to seek spot cargoes," a Singapore-based LNG trader told Reuters.

What could increasing SA oil production do to US LNG? Again, long-term contracts dominate the landscape here so not too much.

The biggest fear here might be the low natural gas prices presenting a headwind for FIDs which can impact forward supply much further out. But we'll worry about that in five years.

LNG newbuild programs are largely concentrated outside of China, so there will be minimal slippage here compared to other segments as a result of the Covid-19 outbreak. With only four newbuilds hitting the water so far in 2020, April is a big month with 9 deliveries expected. This should give some indication as to how deliveries are progressing for these more complicated vessels.

But with gross fleet additions totaling 6.4% for 2020 and cargo demand gains like those above a case can still be made for LNG rates not only holding their ground but also potentially progressing toward the end of 2020, especially if we get some help from Mother Nature.

It's been tough to remain positive on LNG shipping especially as short-term shocks/anomalies batter a multi-year forecast. But I maintain that if (yes I said if) things return to the status quo we will see a structurally improved market compared to just 2017 or 2018. This would mean a normal winter, US/China trade, and a normalization of natural gas stockpiles (hopefully the end result of a normal to cold winter).

My Strategy: Excellent opportunities in preferred stocks.

A welcome headline came on March 25 from Reuters:

China to resume U.S. LPG imports as Beijing waives trade-war tariff: sources

With the exemptions, U.S. LPG is subject only to a 1% import duty, same as rival supplies from the Middle East.

This represents a massive shift which could bring US to China long hauls back into the fray just as SA production increases and low prices threatened US LPG export economics.

Here I want to revisit a section from a VIE exclusive piece on the US/China LPG trade from October 2, 2019.

Below shows the top five destinations in terms of VLGC cargo quantity.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

Japan has long been projected for flat demand growth. S. Korea, Indonesia, and India have all shown impressive gains keeping demand side volume growth healthy.

But notice that China's demand grew relatively little from 2017 to 2018, with very small improvements projected in 2019. This comes in stark contrast to years past.

Obviously, this stagnant growth is due to the loss of a key LPG supplier. China has been scrambling to replace the large volumes previously imported by the US, and has been successful, though growth has suffered.

But as China shifts suppliers, how does this impact shipping?

A better representation for shipping demand comes in the form of cargo miles.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

Here we can see for the first time that while China has maintained the cargo quantity imported, cargo miles have actually dropped. This indicates that those replacements are coming from a shorter distance away.

This shift occurred quite rapidly, highlighting just how fast a major market change can take place along with the corresponding impact on their respective shipping segments.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

Let's put this into some context in terms of the VLGC trade. Over the same period cited in the charts above (January 1-September 26) in 2017, the China to US trade accounted for nearly 8% of global VLGC cargo miles and over 4% of total cargo volumes.

So, who has stepped in to fill the void?

Side note: The below chart not only shows the decline out of the US, but also models the impact from decreasing Iranian VLGC cargoes. This was quite a lot for the market to handle.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

As predicted in the 2018 report, the Middle East and Australia were prime candidates for US LPG substitution. Australia stepped up with a quadrupling of cargo volumes from 2017 to 2019. While the UAE failed to provide any additional quantities, Qatar, Kuwait, and Saudi Arabia all saw major increases over this period. We also saw West Africa play a meaningful role in this trade flow shift. Finally, Malaysia, which represents a very short haul, more than tripled its export volumes to China over this period.

These trade flow shifts in essence hurt cargo mile demand.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

The last chart should drive home the importance of the US with regard to cargo mile demand. Notice the much greater role that the US plays in terms of cargo miles as opposed to cargo quantity. Again, recall that cargo miles are a more accurate representation of vessel demand.

The data above over the period of time selected shows that while VLGC cargo quantities were replaced, the shorter hauls meant that only half of cargo miles traveled were actually replicated. This resulted in a net decline of about 4% in cargo miles traveled by the entire VLGC fleet.

That negative cargo mile development must be balanced against other trends in the LPG shipping segment.

Recall the earlier chart showing both strong volume and cargo mile demand growth in places like S. Korea, India, and Indonesia. However, several other nations are showing increases in imports and while small in comparison to China's market, their collective increases are significant.

In fact, the burgeoning LPG shipping segment was more than able to shake off the loss of the most important route (US-China) and continue to show structural improvement.

Stronger rates are a good sign of an improving market, but not necessarily of a changing structural balance, especially when arbitrage opportunities (short term in nature) have been cited for recent strength.

For that we turn to supply and demand fundamentals, which in this case is represented by net vessel additions and cargo mile gains, respectively.

The following chart shows percent growth for cargo miles and live vessels comparing months on a YoY basis.

Source: Data Courtesy VesselsValue - Chart by Value Investor's Edge

The picture above makes it clear that over the past two years cargo mile percentage growth is outpacing live vessel percentage growth, leading to a structurally tighter market favoring higher charter rates.

Again, this comes even with the US-China trade war leading to stagnant Chinese LPG import growth and shifting trade routes favoring less cargo miles.

Obviously, now we are on the other side of this mountain. China will begin importing US LPG in a very big way to support its energy purchase commitments.

Of course, this comes as the arbitrage trade is dying and other nations can return to a more price friendly and shorter haul MEG LPG source - as China diversifying will relieve price pressure elsewhere. Nevertheless, this setup looks to favor growing LPG cargo mile demand and additionally favors volume gains as China's demand growth had been constrained due to this trade war.

On a side note, that last chart has only become more impressive as February logged a 29.4% gain in cargo mile demand YoY while vessel growth came in at 8.4% due to a heavily front-loaded orderbook. In fact, 10 of the expected 22 deliveries for VLGCs in 2020 have already hit the water, ensuring subdued fleet growth for the remainder of the year.

It is expected that cargo mile demand growth will continue to outpace net fleet growth over the course of 2020 and 2021.

During the last global economic downturn, we had the problem of demand falling off a cliff, but also a massive oversupply of vessels hitting the water at the same time. The latter problem isn't around this time for the most part, so we will be looking at demand side responses and unique market situations.

On the demand side, containers and dry bulk will likely take the biggest hit over the medium run. Mid to smaller containers are only being saved through an exceptionally low orderbook and a previous bear market in 2016 that impacted these sizes extensively resulting in mass demolitions. For a visual of that, look at the fourth chart in the container section and how the fleet numbers dipped starting in 2016.

Tankers and Gas appear to be much better positioned: Tankers by those unique market situations such as contango and opportunistic stockpiling. Gas and tankers as they will likely play a role in the phase 1 trade deal which is taking shape.

We have seen refined products loaded recently and now with LPG cargoes and crude cargoes set to sail, things look to be progressing. Yes, there were delays in the phase 1 trade deal, understandably, but it will begin to take shape.

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