Tanker Rates Seen Sinking 35% Amid Refinery Cutbacks
By Alaric Nightingale and Alistair Holloway
April 6 (Bloomberg) — The most profitable supertanker market in more than a year is heading for a 35 percent slump as oil refineries from Japan to the U.K. shut for maintenance and leave a surplus of vessels.
Shipping costs will fall to an average of $28,758 a day this quarter from $44,576 on April 1, according to the median estimate in a Bloomberg survey of 13 analysts, traders and shipbrokers. Rates to hire the ships, each bigger than the Chrysler Building, averaged $49,908 a day in the first quarter, the most since the last three months of 2008.
The most extensive shipbuilding program in three decades is adding supplies and fewer tankers are being used to store crude, swelling the number of available vessels just as global oil demand drops for the first time in a year. Frontline Ltd., the world’s biggest operator of supertankers, would lose money on any ship it hired out at the survey’s median forecast.
“Refineries are slowing and shutting down and they’ve already imported crude,” said Andreas Vergottis, the Hong Kong- based research director at Tufton Oceanic Ltd., which manages the world’s largest shipping hedge fund. “Crude inventories are high and getting higher. The entire second quarter tends to be soft for tankers.”
Global oil demand will slip about 0.5 percent to 85.9 million barrels a day this quarter, down from 86.3 million barrels in the previous three months, according to the Paris- based International Energy Agency. Japanese refiners including Japan Energy Corp. plan to cut oil processing by as much as 17 percent this quarter, according to company announcements.
Tanker Demand
The slowdown will weigh on shipping because the Far East and Southeast Asia represents 62 percent of demand for supertankers, according to McQuilling Services LLC. Rates along the Saudi Arabia-to-Japan route set a global benchmark for supertankers and form the basis of the forecasts in the Bloomberg survey.
“Asia would be one of the markets where we would expect some kind of flagging demand,” said Mark Jenkins, a London- based analyst at Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. “Asia’s role as a generator of tanker employment has grown substantially.”
ConocoPhillips and Ineos Group Holdings Plc plan to shut or partially close refineries in the U.K. this quarter, data compiled by Bloomberg show. U.S. plants are running at 82.6 percent capacity compared with a 10-year average of 89.3 percent, data from the Department of Energy show.
Refined Products
Shipping rates may also drop as traders use fewer vessels to store crude and refined products. The number of tankers tied up in storage reached a record 168 in November and fell to 104 by February, according to Simpson, Spence & Young.
As an oil glut formed during the recession, traders could profit by purchasing crude, storing it on tankers and selling the barrels for delivery in the months ahead. Those trades unwound after the premium for later delivery evaporated, especially for products such as gasoil.
The number of available ships may also expand as the northern hemisphere’s winter ends, said Jonathan Chappell, an analyst at JPMorgan Chase & Co. in New York.
“Refinery maintenance in Asia will have an impact but an equally big issue is that the fleet runs far more efficiently in summer than in winter,” he said.
Oil Demand
The drop in charter rates may not last long. The IEA forecasts a rebound in oil demand in the third quarter and the Organization of Petroleum Exporting Countries, accounting for about 40 percent of oil supply, increased output for six consecutive months through February. Non-OPEC supply will expand about 0.6 percent this year, the IEA says. The additional supply spurs demand for tankers.
“Normal seasonal trends argue for decreasing rates but not as much as normal,” said Ole-Rikard Hammer, a senior analyst at Oslo-based Pareto Securities ASA, who has tracked tanker markets for more than two decades. “The risk really is on the upside.”
Ship owners may also get help from the scrapping of single- hulled tankers after a global ban began to take hold this year. Single-hulled tankers account for about 12 percent of the fleet, according to Lloyd’s Register-Fairplay. Their scrapping will contribute to an overall 4.2 percent decline in the fleet this year, according to Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker.
Shipping Stocks
The six-member Bloomberg Tanker Index of shipping stocks advanced 7.5 percent this year, more than the 4.2 percent gain in the MSCI World Index of stocks. Frontline added 19 percent in Oslo trading and the Hamilton, Bermuda-based firm is expected to earn $2.33 a share this year, compared with $1.32 last year, analysts’ estimates compiled by Bloomberg show.
Frontline said in February it needs $30,800 a day to break even on its supertankers. Ship owners hire their vessels out in the spot market and on longer rentals at fixed prices.
The median of $28,758 in the Bloomberg survey of rates would still be 24 percent more than the full-year average of $23,130 in 2009. Rates fell so low at some points last year that ship owners were effectively subsidizing their clients by having to pay toward fuel costs.
Global oil demand will rebound in the third quarter to 86.8 million barrels a day, its highest level since the first three months of 2008, the IEA estimates. The world economy will expand 2.7 percent this year, the fastest pace since 2007, according to the World Bank.
Higher Consumption
Ship owners are counting on higher consumption to fill new vessels joining the fleet. Shipping lines ordered the largest number of supertankers since the 1970s after rates rose as high as $177,000 a day in 2008. Fifty-four carriers were delivered from yards last year, the largest number since 1976, according to Clarkson. A further 71 will be added this year.
Refineries ran below capacity during the global recession, potentially allowing them to carry out early maintenance, said Jens Martin Jensen, Singapore-based chief executive officer of Frontline’s management unit.
“Short term, the rates have dropped but I think they will bounce back,” he said.
–With assistance from Yuji Okada and Tsuyoshi Inajima in Tokyo. Editors: Stuart Wallace, John Deane
To contact the reporters on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net; Alistair Holloway in London at aholloway1@bloomberg.net.
To contact the editors responsible for this story: Stuart Wallace at swallace6@bloomberg.net
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