Lars Barstad | Frontline, Oil Demand, Geo-Politics, Shipping Investing, Expectations For 2026

Well, thank you for taking the time to...

Remember? I think it was... It's been a couple of months, that's for sure. Early 2024, I think.

Too fast. It's, you know, it's kind of... we did have quite a volatile 2024, but I think, you know, after Trump's inauguration, I think the pace picked up quite a lot. So a lot of policy changes, to the point actually at the beginning of the year, you know, you almost get paralyzed. You know, not from a kind of a company strategic point of view, because, you know, we do a very simple industry. We pick up oil, transport it and deliver it. And it's actually been a blessing being a part of a working environment where we actually have a job to do every day. But of course, following everything that's been kind of coming, it's been quite a job.

Absolutely. And I think kind of, you know, people have tried to, okay, so now this happens, you know, how will that affect the industry? And now this is going to happen, how will that affect the industry? And, you know, kind of come May, June, I think we started... I remember it probably June because I was in New York meeting a lot of US investors. And then, you know, let's have a step back and see what actually happens rather than try and predict what, you know, eventuality or what policy change may affect the market. Let's actually see it in action. And, you know, this kind of TACO expression came into force, right? And then of course it's a complete waste of time to analyze something until it's actually signed and effectuated.

I think, and I'm... you know, to quote the CEO of Exxon, you know, hydrocarbon is such a marvelous molecule, right? And it's actually being used... first of all, the energy density, you know, it's only nuclear that can match it. And it has so many purposes globally. You know, we've argued for a long period of time that oil demand has a tendency to follow population growth. And it's pretty smack on actually. And then of course, you know, the incremental growth comes from actually people moving out of poverty to become consumers, which is something one actually should regard a good thing. I think what surprised most people is that... because when I saw DNV's first kind of, you know, 2050 vision, their energy road map, I was surprised on kind of how quickly the renewables was going to come into the market and how quickly adoption of renewable was going to be. And it looked really bearish actually, you know, it kind of... we're going to peak somewhere mid-2030 and then, you know, we're going to decline. But what has actually happened is the energy demand globally has increased at such a tremendous pace that oil's relative market share has, you know, it's kind of... it's remained, you know, in volume is reduced in percentage because the pie has just grown quite a lot. And I think it probably tells us that, you know, oil and, you know, non-sustainable energy, hydrocarbons, is probably a bit more sticky than people anticipated, but it's basically because the pie is growing so fast. You know, when I was at a presentation back in September where, you know, a fun fact that China's electricity use for computing is now larger than Great Britain's electricity use. So it just tells you how... and I'm not blaming all on AI, but I'm blaming on kind of population growth, people actually moving a little bit further up the consumer chain, and of course this technology change.

Yeah. But also I think a lot of people have underestimated, you know, kind of the hydrocarbons part of the global economy. And, you know, kind of the easy target is of course environmentalists protesting in the yellow vest which is made out of petroleum. So, it's, you know, it's kind of, you know, pulling up the umbrella, you know, buying yourself a new iPhone when you go to the hospital, you know, kind of... the hydrocarbon is, you know, almost in everything. And as long as we have, you know, kind of we as a race prosper and actually evolve, you know, we like to actually replace this. Of course there's a lot of great initiatives for that, but the volume you need is just tremendous.

No, but I think it's also probably one of the bigger questions in our industry. And it's very difficult to answer. You know, if you look at IEA, EIA, OPEC, you know, all the reporting agencies and the smart banks, you know, they're looking at us to build tremendous inventory for the next year. You know, to the tune of two and a half to three million barrels per day for 2026. But, you know, with that, the oil pricing, the curve is not showing any signs of that at all. And actually that we have, you know, prompt crude is referred to in trading circles as a flat price, you know, just the flat oil price, not that it's flattened by any means, but it's not compounded by spreads or anything. So, and, you know, that we're having, you know, $60 crude-ish, you know, now is, you know, it's very strange looking at the oversupply we in theory have, looking at the oil in transit which is at record highs. So there's like a massive pile of oil waiting to find a home and then oil price can still perform and the oil curve is completely flat. You know, what we should have had for those who are not experts on oil trading, we should have had a contango structure. We should have had cheap crude in the front which gradually with the price increase as demand eats up the oversupply. That's at least the theory, but we don't see that in the market. And I think this is one of the larger kind of question marks. And, you know, the oil price itself, it's, you know, it's a sum of what people think, right? And in that sum is some part to disruption of Russian exports, to some parts what's happening in Venezuela, to some parts how stable is the Middle East. And, you know, so basically everything is compounded into that price discovery, you know, whether if Brent is supposed to be worth 62 bucks or 65 bucks or 58 bucks. So I think it's just symptomatic of, you know, it's very difficult to know what weighs the most in this picture.

Well, we spoke about the busy year, so this year OPEC has actually winded down the cuts or rolled back the volunteer cuts of their production. And, you know, that's had the limited effect on exports all lead up to September this year. So, you know, there's a difference between, you know, price is probably made around exports, you know, how much oil is actually being coming into the market. Production increase that doesn't kind of hit exports doesn't really matter, it's a more domestic thing for the countries that export oil. But, you know, what the kind of OPEC Middle East didn't start to materially increase exports until September, October. But, you know, kind of the big narrative is around are OPEC motivated by price or motivated by market share? And what, you know, people are starting to turn towards now is that OPEC are probably more leaning towards market share than price. But having said that, you know, the biggest producer of them all, Saudi, you know, needs close to 90 bucks for their budget to balance, right? May some even argue more. So $60 doesn't really do much for them. But for the liquidity of the country, that they can actually export more volume, that of course helps, you know, if you can export, you know, 7 million barrels instead of 6. So you basically get more liquidity into the state's coffers. But I'm kind of leaning towards that OPEC probably realize that they need to maintain their market share. You know, and then you probably need a marginally lower oil price not to stimulate kind of future production to come out of for instance the US. Because in this story we've seen great production from Guyana, US, Canada, like pushing this as well. That makes it maybe more complicated to sort of maneuver the market from the OPEC perspective.

I think people are underestimating the efficiency gain that this industry has seen. So, even though we don't have the DUCs, you know, the drilled and completed wells, you know, the existing wells are actually able to produce much more than people anticipated. This is... it's been exactly the same in the North Sea. If one looks back, you know, a couple of decades, people anticipated depletion rates in North Seas to be quite dramatic. They didn't occur at all basically due to new technology, horizontal wells and so forth. So, but, you know, it's impossible to know how much can you tap out of the US shale. But of course, if you can tap more barrels out of a well that's already drilled, already done, everything is kind of sitting there, of course your break-even cost is not the 70 or 80 bucks that they are said to need.

There is of course some, but I don't think it would give you any kind of statistical meaning. The thing is that, you know, a low oil price because demand is not good for us. A low oil price because supply is high, that's very good for us. You know, the largest cost we carry, you know, as running a shipping operation is the bunk of fuel. And of course, fuel prices are correlated, highly correlated with the crude prices. And if crude prices are low, our cost is low. So, you know, so you could actually put that in a frame it together, whereas, you know, kind of oversupply, but obviously not oversupply like we saw during COVID, but oversupply to some degree, creating low fuel prices for us, but also large transportation needs. That's kind of the perfect recipe for Frontline.

Well, it's, yeah, to say the least. I think kind of, and, you know, this is not going to be like a 2025 kind of top 10, but if you're going to do a 2025 top 10, I think right at the peak there would be that we actually had an Israel-Iran war with US bombs landing in Iran and a fairly manageable volatility in oil price and, you know, freight that spiked for virtually 5 minutes and then everything went normal again. Because I think for any oil trader, you know, that conflict which has been lurking and there have been, you know, various theories of how that playbook was going to kind of be. And then we actually have towards the end of June this year, you know, like a full-blown, you know, Iraq invasion kind of operation from the US into Iran. And, you know, mind you, US is Iran's kind of arch enemy above all. And that kind of fizzling out, that is something I did not have in my kind of deck of cards. So, and I think what happened with that, because I was probably not the only one surprised how kind of calmly that, you know, ended up. I think it kind of diffused a lot of political risk. So people that were willing to put a lot of kind of price risk due to political events into oil for instance, they suddenly had to basically recalibrate their model. Because when you can have an event like that affecting crude that relatively little is, you know, that should have been a $150 crude event.

Yeah. So, but you know, just to get it back to where we are now, I think kind of, you know, I'm obviously not a politician, but what's kind of happening between Russia and Ukraine, you know, seemingly Ukraine is struggling on the battlefields. We've seen the sanction regime put on to Russia is not really bearing the fruits that was expected. And I think...

No, because it's too soft.

And then you...

No, it should have been really easy. You know, if you did like Iran sanctions, just say the Russian molecule is now off limits to EU, to US players, to whatnot. But then you would be exposed to the political cost of having high energy prices which no politician would vote for, or it would be a career-ending kind of a decision to make. But so I think kind of Ukraine, you know, their strategists potentially have seen that, okay, we need to take the matter in our own hands. You know, we need to make kind of the... because the oil sale of Russia is feeding that war machine and there's no two ways about that. And, you know, that's why they're going after refineries. That's of course to hurt Russia domestically. You know, if they have a cold winter now and the lack of diesel, it's going to be very difficult for Putin to stay popular. But also on the exporting side, you know, trying to hit kind of terminals in the Baltic, try to disrupt this Black Sea business. I think it's, you know, basically a long-term strategy to try and limit kind of their income streams.

No, because, you know, it plays out, you know, completely different than you believe. And I think if back rewind to June, I think nobody expected Iran to give the concessions they did and to basically agree to, you know, let's agree to not to disagree and then, you know, we'll stop kind of any warlike action from here on in. I think Iran was probably at a breaking point, you know, and I would be surprised if Israel wanted to push further. But, you know, I think the world was probably better off having a stable, some sort of stability in that very, very key region of the world.

You know, it's kind of... I think eventually we're going to be paid for not partaking. Not that we could even, you know, we're stock-listed companies, we have lenders, we have insurers and so forth that we kind of want to... but I think, you know, some parts of the tanker industry has had a screaming bull market now for the better part of three years or close to three years actually. I think, or my hope is that, you know, we who have stayed compliant are going to reap the benefits for that in the long term after, you know, at some point here, you know, the table is going to turn.

No, because at the end of the day it's supply and demand driven. But more notably, the last cycle which we, you know, talked about endlessly, you know, the period from 2003 until 2008 or 2009 or whatever, that was a demand-driven story. You know, ever since China joined the World Trade Organization and China became, you know, fast-growing economy, you know, their kind of oil demand growth surpassed anybody's expectation. And of course the fleet was not there to cater for it. So you didn't have enough supply of vessels to manage their increased demand of oil in particular and coal and iron or every other commodity under the sun. But this time around, you know, since ever since kind of, you know, ESG came into fashion and the non-sustainable businesses and so forth were targeted and looked upon as a bad investment, we've had this kind of vacuum of investing in the industry that we represent. An industry that, you know, a lot of kind of... there's a lot of other shipping segments that have seen kind of some of the same. And so we are kind of still to this day underinvested in transportation and particularly so for oil. If you look at, you know, look at the regulatory framework that is kind of around us, we're trying to reduce emissions and so forth. You know, at the same time we have the oldest, probably most inefficient fleet we've had for 25 years. And the average age is important because, you know, it is still so... and this is a fact, this just came up in the industry meeting I had. Well, is this really a limit at 20 years? You know, wouldn't people just shift to older vessels if they can? And, you know, the entire kind of oil trading complex is not set up for 20-plus tankers. You know, it's... and I think the proof is in the pudding. We've done voyages that pays 130, 140, even $160,000 per day. The charter has not gone to 20-plus. They continue to fix modern vessels. So, and this is kind of... it's logical because in that oil trading chain, there's a lot of pieces you don't control. Even if you're Exxon or you're Equinor or whoever you are, first of all, the most important thing when you move oil is optionality. Even though the cargo may be destined potentially to your own refinery where you also own the terminal, you know, none of these vessels are fixed without options because if something happens to oil price, you know, in the next kind of 60 days until that oil arrives at the refinery or 90 days for that sake, you want options. And then if you have a 21-year-old vessel, you basically lose 80% of those options because there's so many other terminals that you don't control that will have these limitations. But you can't even start there because trading oil is a margin game and, you know, a 20-plus vessel, the insurance on the cargo will just go through the roof and kill the margin in the first place. So this is why, you know, kind of advanced oil traders of this world will tell you that the only thing they can use the 20-plus vessel for is storage potentially and then they have kind of a long-term plan for the vessel. Or of course if the vessel is just going to go shuttle between A to B, we've seen this in India, you know, so kind of if it's an Indian-flagged vessel it can actually live until it's 25, but that's for designated trades, you know, where the logistics are under control, you know, they know exactly where it's going to load and where it's going to discharge. No. So, and then just to get back to this old school bull market, you know, if you put into your model that tankers actually don't trade in any market really, well, at least in the compliant market after they're 20 years old, we're going to have a very limited growth, fleet growth for the next two, three years. We've actually had a period of negative growth. If you look at vessels, the population of vessels below 20 years, that has been negative for VLCC since 2021. For all the asset classes that at least Frontline are trading in, it stopped growing sometime in September 2022 and has actually reduced ever since. So, with this and the realization that oil demand is probably not going to stop growing, then we're going to be short tonnage. We're not going to be short oil as we just discovered. We're not going to be, you know, kind of the product is going to be transported, but we're going to be a little bit short on the shipping side.

Yeah, no, it's... and it's a very good question. I don't have the answer. But, you know, we saw the Frontline stock price rally in 2024, it just rallied straight through... or not through, but I think we had a couple of kind of points on the tape is above 30 bucks or 300, north of 300 kroner. And then of course we had an awful second half in 2024. But I think that rally was priced on anticipation. There's a lot of anticipation in the market. You know, this everybody understands this, you know, kind of structural long-short story. You know, we're long oil or not long, but, you know, the oil market is going to persist, but we're potentially tight on the shipping capacity to actually freight this. And, you know, it's just like being in a city where lots of people want to take the taxi and the number of taxis are just gradually reducing every year. So everybody understood that and that kind of culminated then in a pretty awful fall of 2024. Now, come 2025 where I would potentially say that there are more pieces, you know, falling into place. People are reluctant to buy into it and I maybe they just want to see, you know, kind of a more solid proof in the pudding. They actually want cash into their dividend account before they're willing to commit more cash into the stock. You know, I think it's difficult to believe that we'll have VLCC rates hovering $100,000 per day for a longer period of time. Even I find it difficult to believe that. But that we kind of potentially structurally have, and I'm probably going to jinx it now, but that we structurally in this market have, you know, turned a corner to some extent. I feel kind of, you know, I feel I have some support for that claim, but who knows.