[EN-SEA] Tankers Used for Oil Storage Signal Slump in Freight Rates

When they unload in 6 months, they will add to vessel supply and lower rates

(LONDON) A 42km-long line of idle oil tankers, enough to blockade the English Channel, may signal a 25 per cent slump in freight rates this year.

The ships will unload 26 per cent of the crude and oil products that they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of US$30,000 a day this year, compared with US$40,212 now, according to the median estimate in a Bloomberg News survey of 15 analysts, traders and shipbrokers.

That is below what Frontline Ltd, the biggest operator of the ships, says it needs to break even.

Traders booked a record number of ships for storage in 2008, seeking to profit from longer-dated energy futures trading at a premium to contracts for immediate delivery, according to SSY Consultancy & Research Ltd, a unit of the world's second largest shipbroker.

Ships taken out of that trade would return to compete for cargoes just as deliveries from shipyards' largest-ever order book swell the global fleet.

'The tanker market has been defying gravity,' said Martin Stopford, a London- based director at Clarkson plc, the world's largest shipbroker. Stopford has covered shipping since 1971.

More than half of the ships are in European waters, with the rest spread out across Asia, the US and West Africa. Lined up end to end, they would stretch for about 26 miles.

Traders are storing enough crude at sea to supply the 27-nation European Union for more than three days.

Royal Dutch Shell plc, Europe's biggest oil company; London-based BP plc; JPMorgan Chase & Co; and Morgan Stanley were among those that sought vessels for storage.

By the end of November, 168 tankers were storing crude or refined products, according to data from Simpson, Spence & Young Ltd, the world's second largest shipbroker.

Their combined carrying capacity of 23.8 million dwt is equal to 5.9 per cent of the tanker fleet.

That exceeds the previous record, set in 1981, when Japanese refiners used tankers with a combined 19.5 million dwt.

The storage helped prop up tanker rates this year as the Organisation of Petroleum Exporting Countries (Opec), accounting for 40 per cent of global oil supply, made the deepest-ever output cuts in response to the worst global recession since World War II.

The storage trade is profitable so long as the spread between energy contracts exceeds ship rental, insurance and financing costs.

Two years ago, the spread between the first and sixth Brent crude oil contracts traded on the London-based ICE Futures Europe exchange was 23 per cent. Now, it is 4 per cent.

Daily returns from leasing supertankers on the industry's benchmark route from Saudi Arabia to Japan advanced to US$40,212 on Dec 24, compared with US$1,246 on Sept 11, data from the London-based Baltic Exchange show.

'If tanker rates go up, everybody will get rid of ships,' said Andreas Vergottis, Hong Kong-based research director at Tufton Oceanic Ltd, which manages the world's largest shipping hedge fund. 'It's going to be a market that's worse than 2009.'

Mr Vergottis expects the global tanker fleet to expand about 12 per cent next year, of which five percentage points will come from ships returning from storage.

That compares with the Paris-based International Energy Agency's forecast for a 1.6 per cent gain in global oil demand.

Crude oil storage will slump to 40 million barrels in six months and 19 million barrels in a year, from about 50 million barrels now, according to the Bloomberg News survey.

Oil-product storage will shrink to 69 million barrels in six months and 29 million in a year, from 98 million now, the survey showed.

Brent crude will average US$75 a barrel in 2009, about 1.7 per cent less than the closing price of US$76.31 on Dec 24, according to the median of 37 analyst estimates compiled by Bloomberg.

Gasoil will average US$679 a tonne this year, compared with US$635 now, forecasts compiled by Bloomberg show.

Storage 'already lasted a lot longer than most people anticipated', said Jonathan Chappell, an analyst at JPMorgan in New York with 'underweight' recommendations on Frontline and Overseas Shipholding Group, the largest US-based oil-tanker owner.

Ships unloading their cargoes will rejoin a fleet set to expand 3.5 per cent this year, according to London-based Drewry Shipping Consultants Ltd. The order book for tankers stands at 121 million dwt, or 32 per cent of the existing fleet, it estimates.

Source : Business Times-Bloomberg, 05.01.10.