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  14th July 2008 - STAR MARITIME

High oil prices hurt tanker industry

OIL prices that generated record-high shipping fees for Frontline Ltd and the rest of the tanker industry may now reduce their earnings, as demand growth slows and a new armada is about to flood the market.

Frontline, the world’s biggest oil shipping company, led the five-member Bloomberg Tanker Index to its best quarter in almost four years.

Now the industry will contend with a 15% drop in rental rates in the second half. This is a forecast made by a Bloomberg survey of 13 analysts and brokers.

Earnings will weaken because of a fleet expansion that the International Energy Agency said would “massively” exceed growth in cargoes over the next two years.

The increase in vessels combined with the slowest growth in oil demand for six years as the global economy loses steam, driving tanker rates 65% lower by 2010 as reflected from futures contracts.

“Industries are having a tough time and consumption must go down. We can’t live in this protected environment in shipping forever,” said Per Mansson, managing director at shipbroker Nor Ocean Stockholm AB.

Only seven of 17 analysts, or 41%, agreed that investors should buy shares of Bermuda-based Frontline.

The stock gained 25% to 322.5 kroner (US$63.51) in Oslo trading so far this year.

“We still see a very strong tanker market for the next one or two months, but then there are concerns down the road, over the next three to six months,” said Billy Chiu, commercial director at BW Shipping Managers Pte in Singapore, a unit of the world’s largest private owner of supertankers.

Record oil price is “the fundamental” threat to vessel demand, he added.

The tanker fleet’s capacity will increase 18% to 432 million tonnes of oil by the end of 2010, according to London-based shipbroker Simpson, Spence & Young Ltd.

In the same period, oil demand will expand 2.7% to 89.2 million barrels a day, said Paris-based IEA.

Frontline interim chief executive officer Jens Martin Jensen expected less growth in capacity.

“Although 120 very large crude carriers would join the fleet, it will be offset by 100 single-hull ships phasing out due to new standards of environmental protection. We will actually see a rather less dramatic fleet growth,” he said.

Profits from supertankers are expected to drop by 15% to US$100,000 a day in the second half, based on the median estimate from the 13 analysts and brokers.

In 2010, rates are expected to further plunge to about US$67,000 a day, according to data from Imarex ASA in Oslo, a freight-derivatives brokerage.

The number of ships competing for cargoes may also swell in the next two months because Iran, Organisation of Petroleum Exporting Countries’ (Opec) second-largest oil producer, is freeing up supertankers that it is using to store crude in the Persian Gulf, Chiu said.

The National Iranian Tanker Co cut the number of idling ships to 11 from 15 in the last two weeks, according to Bloomberg data.

The use of vessels for storage helped tanker rates to swell more than triple since April, delivering rental income of almost US$196,000 a day for Frontline, Overseas Shipholding Group Inc and Euronav NV, according to prices from London’s Baltic Exchange and a formula from Oslo-based shipbroker RS Platou A/S.

There are 60 supertankers available for hire in the next 30 days up from 48 a month ago, estimates broker Barry Rogliano Salles in Paris.

Meanwhile, Opec is pumping more than ever before, bolstering demand for ships, Bloomberg estimates showed.

“All the extra oil that comes out of the ground will go to Asia,” said Andreas Vergottis, research director at Tufton Oceanic Ltd, the world’s largest shipping hedge fund.

Tanker firms will still be earning more than in the last several years.

The average cost of sending supertankers from the Persian Gulf to Japan was about US$46,000 a day from 1998 to 2007, according to Drewry Shipping Consultants Ltd. Rates will average a record US$107,000 a day in 2008, Bloomberg’s survey shows.

The market will also be buoyed by more demand for double-hull tankers from Asia, spurred by the puncturing of the Hebei Spirit in December, the worst oil spill in South Korea’s history.

Single-hull tankers will be banned globally from 2010. As many as 43, or almost 10% of the fleet, have been sent for conversion either into commodity carriers, oil-storage ships or double-hulled crude transporters since the start of 2007, according to Lloyd’s Register-Fairplay.

Demand for tankers in Asia may weaken after China raised its fuel prices by a record 18% last month, said Mark Jenkins, an analyst at Simpson, Spence & Young.

“We’ve moved into a completely different ballgame as far as demand is concerned.

“There’s enough evidence coming through to suggest we are going to see a stronger response to this particular hike than previous ones,” said Martin Stopford, a London-based executive director at Clarkson Plc, the world’s biggest shipbroker.


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