NASDAQ PXS 2.87 +0.21 +7.89%
Volume: 46 May 25, 2022

We at Pyxis believe that our quality vessels, operated safely and well maintained by our managers, lead to attractive chartering arrangements and cost-effective return on capital for the benefit of our shareholders.

Primarily, we address the worldwide market for the marine transportation of refined products, which is driven in turn by demand for transportation fuels, including gasoline, diesel/gas oil, jet/kerosene and naphtha. We believe that fundamental population growth combined with increasing per capita incomes and further industrialization will lead to long-term demand growth globally for transportation fuels. However, the outbreak of the pandemic COVID-19 in early 2020 negatively affected global economic conditions and contributed to a significant decline in the prices of crude oil and refined petroleum products. Starting the fall, 2020, we saw a gradual global economic recovery which was supported by record setting monetary and fiscal stimulus programs of leading governments and central banks. Moreover, the roll-out of multiple vaccine started in late 2020 which led to robust economic activities and mobility, primarily in developed countries. However, the introduction of the Omicron variant in late 2021 resulted in a further delay for better chartering conditions of product tankers due new government restrictions, which hurt demand for transportation fuels, a major source of cargoes. Moreover, the invasion of Ukraine by Russia in late February, 2022 has shocked the global energy markets. As a member of OPEC+, Russia is a major producer of crude oil and exports ~8M b/d of crude and refined products of which a major portion goes to Europe. As a result of this war, many countries have introduced a broad range of sanctions on Russian goods and commodities, including petroleum products, which has started to affect global trade and relationships. In addition, the rapid increase of inflation, continued supply chain disruptions and the China’s prolonged battle with Covid, should result in slower economic activity for most of 2022. However, the situation continues to be very fluid, complex and uncertain. The outlook in the short-term will be dependent of the impact of geo-political events and continued effective treatment for Covid, including vaccination rates and further government restrictions/lockdowns.

The United States, Asia and Middle East are the largest exporters of refined products, accounting for over half of total exports. Refining capacity, domestic demand and worldwide arbitrage opportunities can influence the movements within these regions. In the past, global shifts in refining capacity and the increase in U.S. crude oil production, led by the rapid expansion of shale-based oil, have been positives for demand of product tankers. In mid-March, 2022, a leading industry source estimated that growth in the seaborne trade of refined products would increase 5% in 2022 to 1.06 billion tons. Seaborne trade of products has been correlated with historical global GDP growth. In January, 2022, the IMF updated its global GDP growth forecast for 2022 to 4.4%, but given recent world events, this rate is likely to be revised downward in its April update. In March, 2022, the IEA forecast that oil demand would still rise 2.2Mb/d to 99.7M/bd in 2022 despite recent headwinds. Inventories of crude and many petroleum products are significantly below five year averages, especially in the OECD. The progressive roll-back of prior OPEC+ crude cuts should add additional barrels monthly through Fall, 2022. However, incremental supplies from the U.S., Canada, Brazil and elsewhere should be limited in the short-term. For example, in early March 2022, U.S. oil production of 11.6 mb/d is up significantly from a trough 9.8 mb/d during 2020, but still below the peak of 13Mb/d in late 2019. So, supply disruptions and high prices of petroleum products are likely for most of 2022. In fact, U.S. gasoline prices hit 14 year highs in March, 2022. Changes in refinery locations have also led to further ton-mile demand for product tankers. The emergence of export-oriented, highly efficient mega-refineries located near the well-head, e.g., the Middle East, and the reduction of OECD (namely in Europe, Japan and Australia) refining capacity are examples of factors that influence locations of refineries. In March 2022, Drewry estimated that 4.92Mb/d of new capacity is scheduled to come on line between 2022-2026, virtually all non- OECD. In 2021, refinery shut-downs aggregated 0.73 M b/d of capacity, and more capacity will go off-line, principally in the OECD. This should result in greater importing of refined products into these mature large markets and an increase in ton-miles. OECD refinery capacity has declined 12.4% to 34.3M b/d since 2017. Non-OECD refineries account for 55.7% of global capacity as of 2021.

Product tankers are differentiated by their coated cargo tanks, predominately epoxy-based paint, which minimize any corrosion from refined petroleum products and facilitate the rapid cleaning of cargo holds. Based on carrying capacity, the worldwide product tanker fleet ranges from small tankers under 10,000 deadweight tons (or dwt) carrying capacity to 120,000 dwt. A main group of vessels transporting the majority of cargoes consists of 3,002 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 164.1 million dwt as of February 28, 2022. Our area of focus, the Medium Range (or MR2) category, typically 40,000-55,000 dwt, consists of 1,615 tankers, representing 47.4% of total product tanker carrying capacity. MRs are considered the workhorse and usually operate in the Atlantic and Pacific basins. Customers include major integrated and national oil companies, international commodity trading firms and refiners.

The vessel supply picture continues to look very positive with low new ordering and increased tanker demolition. The growth in the supply of product tankers is primarily related to new build orders, usually placed at Asian shipyards, and demolition of older tonnage. Aggressive new orders of dry bulk and containerships have resulted in delivery slots for new tanker orders being pushed into 2024.The placement of orders for new builds is primarily a function of a shipowner's outlook for demand for such vessels (i.e., future charter rates), construction costs and availability at the yard, age of the existing fleet as well as cost and availability of funding. Other decision-making factors for an owner include developments in ship and engine design, scrubbers, stricter environmental regulations, as well as the availability and pricing of alternative low-carbon fuels. Product tankers have an expected operating life of 25 years, but certain major charterers have lower age restrictions.

Drewry estimated the MR2 orderbook was 7.4% (119 vessels) of the worldwide fleet as of February 28, 2022. Only 35 MR2 were ordered during 2021 and just 2 units in first two months of 2022. Slippage in new build deliveries has averaged 13.4%/ year during 2017-21. It also estimated 7.1% (or 114) of MR2s were 20 years or older. Product tanker demolition increased significantly in 2021 to 33 MR2 and in the first 2 months of 2022, 7 MR2 were scrapped. Ever-expanding environmental regulations, current record high bunker fuel prices, greater running costs, peak scrap metal prices and lower charter income have increased demolitions of older tankers. We estimate that fleet annual growth for 2022 and 2023, net of vessel scrapping and delays in MR2 newbuild deliveries, to be approximately 2%.

Tanker operations and vessels are significantly regulated by international conventions, such as SOLAS and MARPOL, class requirements, various governmental health, safety and environmental laws and regulations, including OPA and CERLA, IMO regulations and by other jurisdictions. The independent classification societies certify that a vessel has been built and maintained in accordance with established rules and regulations, including periodic inspections and surveys of the vessel. In addition, many charterers have established certain standards to employ vessels carrying refined products guaranteed by strict vetting processes. Consequently, quality vessels and flawless operations are paramount within the product tanker industry.