Limited Demand for Oil Starting to Affect Tanker Market

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Saturday, 07 March 2009

Demand for oil will remain in low levels in the coming months as the world economy remains stuck in recession and there are not clear signs of recovery in the horizon. This situation pushes oil prices and of course oil producers’ revenues, but at the same time poses questions about the future level of freight rates in tanker market. Supertankers that once raced around the world to satisfy an unquenchable thirst for oil are now parked offshore, fully loaded, anchors down, their crews killing time. In the United States, vast storage farms for oil are almost out of room. As demand for crude has plummeted, the world suddenly finds itself awash in oil that has nowhere to go.
It's been less than a year since oil prices hit record highs. But now producers and traders are struggling with the new reality: The world wants less oil, not more. Even if OPEC members would not cut again their production in the forthcoming meeting of Vienna in March 15, the situation will not be brighter as the main problem is the distressed demand. And turning off the spigot is about as easy as turning around one of those tankers. So oil companies and investors are stashing crude, waiting for demand to rise and the bear market to end so they can turn a profit later.
Sooner or later, reduced movements of crude oil are likely to catch up with the market, according to analysts who have soured on the listed tanker owners with the broadest spot market exposures. One shipping specialist investment bank, maintaining its “Hold” on Frontline, says:  “We expect utilization issues apparent in 4Q08 to become more severe in the first part of the year, with OPEC output over 2 million bpd below the summer peak.”  
The views of a leading Wall Street energy analyst at well known firm explain the predominantly gloomy nearby view of the tanker market for the months ahead. The analyst, also covering a wide spectrum of energy service stocks, says: “Oil movements data continues to indicate a substantial pullback in AG oil shipments. AG sailings and oil in transit (both eastbound and westbound) dropped <in late February> and are sitting well below their multi-year averages.” In his firm’s view, the catalysts for crude oil storage are disappearing. The analyst (who was predicting oil’s move up towards $150/ barrel last summer with uncanny accuracy) tells investors, in a recent commentary: “The combination of OPEC cuts ramping up, a falling Brent curve (suggesting further cuts needed, in our view), and a flattening <forward oil price> curve should put significant pressure on surprisingly resilient tanker rates.  
Such statistics notwithstanding, VLCC chartering was active as February ended. Double hulled tonnage was getting a solid Worldscale (WS) 47 for voyages to the East, as seen by HMM’s fixture of the "C. Vision" for a cargo to Bataan. The "New Valor", a 1992 double hulled vessel, took the same rate on a PTT charter AG/ Taiwan, although the single hulled "BW Nile", built 1991, was only able to garner WS 37.50 on a lifting to Ningbo. Exxon Mobil paid WS 50 on a VLCC cargo to Singapore, chartering Blue Nile. Conoco also paid WS 50, chartering "Habari", for an Eastbound lifting. Toward the end of the week, Bluelight reportedly paid WS 50 on a cargo to China on "Astipalia", the same rates paid by Chevron on a Taiwan bound shipment fixed on "New Century".  
A cargo to South Korea was reportedly done at WS 46. Exxon Mobil obtained a discounted WS 37.5 on "Maersk Navarin" for a cargo into the U.S. Gulf, where some ship counters estimate that more than two dozen ships are sitting with storage cargoes. Analysts have suggested that owners may be induced into agreement on low rates where they see a prospect of ample demurrage payments a month outward.  
Traders of forward freight agreements (or FFAs) are putting money on bearish views of the rate term structure. On Imarex, the 4Q 2009, traditionally a time of a seasonal pickup, has been settling at WS 42 (around $35,000/day TCE), contrasted with the present spot VLCC rate of WS 47.5 (in line with the recent fixtures, and working back to $40,000/day TCE). For the typically slower summer months, sellers have been willing to concede levels around WS 34- which works back to barely remunerative $22,000/day. For Suezmazes, the forward levels of FFAs predict summer doldrums at $28,000 / day (WS 60 on West Africa/ Philadelphia)- hardly the stuff of raging bull markets.