<article><p class="lead"><i>The crude tanker market has been depressed since the second half of 2020 with sluggish demand keeping freight rates at or near multi-year lows. Derek Solon, chief commercial officer at International Seaways, spoke with Argus about the current state of the market and how his company is navigating the downturn and preparing for a recovery. In this first installment of a two-part interview, Solon also goes in-depth on the company's <a href="https://direct.argusmedia.com/newsandanalysis/article/2201111">merger with Diamond S Shipping</a> and what he sees as signs of a rebound in tanker demand. The interview was edited for length and clarity.</i></p><p class="lead"><b>In July the merger of Diamond S Shipping with International Seaways was completed. What is the biggest advantage and challenge of this merger? </b></p><p class="lead">The biggest advantage of the merger of International Seaways and Diamond S is the scale of the fleet and the fleet growth we were able to achieve in one transaction in a short period of time. We were able to achieve it during the downside of the market. You want to do a strategic transaction and strategic growth like this when the market hasn't fully recovered yet because once the recovery comes around, the asset prices can get too expensive and these kinds of deals get a bit more challenging.</p><p>We've tripled our fleet by ship count. By increasing our scale we're going to be able to get a lot closer to customers, charterers, our end-users, and present them with more options. We are hoping that will also lead to the ability to further creative project work with the end-users, as we did with the <a href="https://direct.argusmedia.com/NewsAndAnalysis/Article/2195739">Shell dual-fuel VLCC order</a>.</p><p>One challenge is the pace of things. It's been less than two months since the merger was concluded. We delivered nine ships that were sold to different buyers and that's occurring as the fleet is growing. Now it is integration time. We've been fortunate with the International Seaways staff and Diamond S staff which have very similar cultures. We have to harmonize the cultures ashore and harmonize the culture of daily shipboard operations.</p><p class="lead"><b>Do you think we'll see less or more M&amp;A activity in shipping in the coming year? </b></p><p class="lead">The industry always talks about consolidation. Where it is possible, companies like ours are going to look to do other transactions. I don't think M&amp;A activity will cease as the market improves.</p><p class="lead"><b>How has the pandemic impacted demand and what is International Seaways doing to prepare for any potential Covid-19 variants or other disruptions?</b></p><p class="lead">Oil demand is clawing its way back up to pre-pandemic levels. The Delta variant and maybe other variants we are reading about now are going to have an impact on oil demand and the freight markets. But the way the world is reacting to increased cases is different from the way we reacted in March/April 2020. Certain countries West of Suez seem to be more reliant on strong vaccination rollouts and are resistant to large-scale lockdowns like we saw in 2020. The result is an impact on demand — no question demand went down as a result of the Delta variant — but we are seeing that impact more regionalized. It won't be a severe as we saw in 2020. </p><p>What we do and how we prepare for that is to keep Covid off the ships, which we were successful in doing throughout 2020. What we are going to do is keep the fleets mostly exposed to the spot market for right now because we don't want to look at too much time-charter business while the market is where it is. We want to keep that spot exposure because we want to capture that inevitable upturn. </p><p>Another thing we are doing at the tactical level is talking to our pools about slow-steaming and pushing them to look at slow-steaming where it makes economic and market sense. On the VLCCs, if we slow-steam, balancing conditions in a low-freight, high-bunker environment, the improvement to TCE (time charter equivalent) is palpable. Every couple of dollars helps the bottom line. And as more of the fleets start to slow-steam you start to impact fleet supply — you're taking away ships from the market. Some of our pools have been successful working with charterers and getting slower speeds in laden conditions, that will also help the efficiency of the market. </p><p>Our business model is putting ships into tanker pools, and tanker pools have to prove their value in the down markets. When you have good, strong pools like we are in, these guys work day in and day out to gain access to cargoes and have good relationships with customers, get contracts of affreightment. What that means in these low markets is that we've had more access to cargoes.</p><p class="lead"><b>What are some indicators you are looking for that would signal the start of a recovery in the crude tanker market?</b></p><p class="lead">The thing I've watched closely are oil stocks. When Covid hit, it coincided with a battle for market share with Russia and Saudi Arabia. And then oil demand goes down, but the stock build was incredible. We all knew you couldn't have a recovery until the stocks are drawn down. The good news is we are there now.<b></b>Stocks are below five-year averages, US stocks are lower and China has to be feeling the squeeze for supply because they announced their first auction from their strategic petroleum reserve. We are seeing stocks draw down. </p><p>We've always watched supply but this is where an increase in supply becomes meaningful if you don't have that large stock to draw upon. One thing that's not here yet that I would like to see is US Gulf crude exports with a couple of repetitive months around 3mn b/d. We are just not there yet. But that's what we and everyone else are watching — demand — and we are hoping it climbs.</p><p>On a more tactical level what we watch is trading ships, when the big oil companies and trading houses are asking a lot of questions: What would you do for a two- to three-year time charter? What would you do for a two-year time charter but delivery four months from now? They don't see an immediate increase but like most of us, they see the inevitable return to strength of the freight market.</p><p class="bylines">By Liz Ramanand</p></article>