Oil tanker rates rebound
As the recession eases and oil demand rises, day rates in the oil-tanker market have rebounded. But the sector's susceptibility to volatility should not be underestimated, writes Martin Clark
AFTER SEEING 12-month-high price spikes in the December to January period, there is a better feeling in the tanker markets this year. "Oil demand is forecast to rise on the back of stronger economic growth. This means expectations are higher than 2009," says Steve Christy, research director at EA Gibson, a shipbroker.
The market certainly started 2010 on a bullish note, with rising spot rates, mostly in response to higher crude prices and stronger demand. Very large crude carrier (VLCC) spot earnings surpassed $100,000 a day briefly in January, the highest level since October 2008, in part because of extremely cold weather in Europe and North America.
Nonetheless, the sector's susceptibility to volatility should not be underestimated. Assumptions of improved rates throughout 2010 – and beyond even – should probably come with a health warning. Investment group Jefferies & Company sees spot market rates steadily rising through this year and into next. For a new VLCC, spot rates of around $25,000/d in the final quarter of 2009 reach $55,000/d by the end of this year, according to its forecasts. It predicts a $40,000/d average for the whole of 2010, rising to $60,000/d in 2011.
Similar rises are forecast for the other, smaller vessel categories, although these can sometimes buck the trend, according to Christy. "In some sectors, rates could well be lower than in 2009," he says.
While a recovery in the global economy remains central to this generally upbeat analysis, there are other positive factors influencing the market. The phase-out of single-hull vessels continues, with opportunities shrinking by the minute for these still-active, older tankers. Most of the world's large single-hull discharge ports have announced the banning of single-hull vessels, with China the most recent, in November. The UAE port of Fujairah – an important refuelling port in the Mideast Gulf – also recently announced a ban on refuelling single-hull tankers.
Net tanker-fleet growth is also expected to slow down. This is critical if any new demand is not to be mopped up straight away by the arrival of more ships. Net fleet growth is tipped to rise by 3-4% in 2010, according to Jefferies, with 35.6m dead-weight tonnes (dwt) of single-hull tonnage potentially demolished in accordance with IMO phase-out regulations. This is significantly less than the average 6-7% net fleet growth recorded between 2006 and 2009.
Delays and cancellations to newbuild orders following the credit crunch are also still having an effect, preventing deliveries from reaching projected levels.
But it is floating storage that will probably have the greatest short-term bearing on the tanker market. This has been an influential market force since early 2009, as a result of the oil-price contango – when forward prices exceed spot prices – weakened oil demand, high land-based oil stocks and mostly subdued freight rates (PE 12/09 p31).
According to EA Gibson, 149 tankers were holding around 55m barrels of crude and 98m barrels of clean products in floating storage at the close of 2009, enough to satisfy global oil demand for about two days. This tied up 6-8% of the VLCC fleet and as much as 35% of the next tier of ships – Suezmax and Aframax tankers, in the 80,000-159,999 dwt range. But by the end of January, the number of vessels in use for storage had fallen to around 119; still high, but some way down on last year.
In terms of day rates, the contrasting fortunes of the big ships – those used for storage – with smaller vessels during 2009 illustrates the significance of the storage issue. VLCC earnings on Mideast Gulf to Asia routes averaged over $31,000/d. Product tankers in the 25,000-50,000 dwt range – one of the few tanker segments not used for storage – "soberingly averaged" $7,000/d on UK-to-US routes, says EA Gibson. "Floating storage has done a lot to support the market over the last nine months," says Christy. "It will remain very important in the short term. If this continues at present levels then the market will be higher in 2010. If it disappears, spot charter rates will fall."
2009 – an ugly year
Given the consensus view that 2009 was pretty ugly – a phrase coined by Overseas Shipholding Group (OSG) executives at an investor show in December – the year has started out fairly well. The return of $100,000/d spot-price spikes in January may have seemed like a return to the good old days – rates have at times exceeded $250,000 in years gone by – but it is not enough to offset the reduction in 2009 demand and increased tanker supply.
Opec oil output is an important barometer of freight rates. If the oil cartel responds to rising demand and pushes production up, it will be a positive sign for tanker operators.?
Piracy surges again
REPORTED piracy incidents increased again in 2009, for the third successive year. According to the ICC International Maritime Bureau's (IMB) Piracy Reporting Centre's annual report, released in January, 406 incidents of piracy and armed robbery were reported in 2009. It is a significant leap on the 293 reported attacks in 2008.
The perils of sailing off the coast of Somalia remain evident, where more than half the total number of reported incidents took place. Of 217 incidents, some 47 vessels were hijacked and 867 crew members taken hostage. Next most dangerous is Nigeria, with 28 reported incidents in 2009, although the IMB added that attacks there are typically more violent.
The IMB says the Somalia attacks still remain "opportunistic" in nature. But it noted a shift by the pirates, away from the heavily patrolled Gulf of Aden – the main hotspot in 2008 – to the more open waters of Somalia's eastern coast and out into the Indian Ocean.
Some hijackings took place more than 1,000 nautical miles from Mogadishu, it said. Among the ships still in the hands of pirates is the chemical tanker Theresa VIII, which was hijacked last November in the south Somali Basin, northwest of the Seychelles. It is one of three chemical tankers now being held.
The skipper of the Theresa VIII reportedly died from gunshot wounds sustained during the attack. It reflects the bloody story behind the statistics, with vessels now caught up in a daily fight for survival on the high seas, despite the presence of warships from around the world. Officials at Iranian tanker group NITC admitted last year that it routinely hires former UK commandoes to fight off violent attacks by pirates.