Bloomberg News

Persian Gulf Oil-Tanker Rates May Rise Next Week

May 12, 2006

The cost of shipping crude oil from the Middle East to Asia on 2 million-barrel tankers, near its highest level in four weeks, may advance further next week as refiners begin booking ships for June loading dates.

``Next week people will receive June dates and there are still a couple of cargoes left in May that haven't been matched with ships,'' said Ody Valatsas, a broker at Athens-based shipowner Dynacom Tankers Management Ltd. ``I expect the market to go higher.''

Freight rates on the benchmark route to Japan, which have gained 11 percent since April 3, may rise further as Asian oil refiners receive notice of June loading dates from Middle Eastern producers and arrange shipments. Refiners usually increase their crude intake in June after completing seasonal maintenance.

Rates were last assessed by London's Baltic Exchange at WS 65.8, as measured in Worldscale points, just below the four-week high of WS 65.9 recorded on May 5. The route to the Gulf of Mexico coast was assessed at WS 67.92, a five-week high.

Worldscale points are a percentage of a nominal rate, or flat rate, for a specific route. Flat rates, quoted in U.S. dollars a metric ton, are revised annually by the Worldscale Association, based in London and New York, to reflect changing fuel costs, port tariffs and exchange rates.

The remaining supply of vessels will have to be used up before the market can rise further, according to Fearnleys AS, another Oslo-based broker. About 69 vessels are available to load cargoes in the next 30 days, compared with 65 in the broker's week-ago estimate.

The figure excludes ships operated by Frontline Ltd., the world's biggest oil-tanker company by capacity, and Tankers International LLC, which runs a fleet, owned by nine shipowners, of 47 very large crude carriers. Those can carry about 2 million barrels of crude.

Hyundai Merchant Marine Co., South Korea's largest shipping company by market value, signed up a VLCC called Washusan, to load a cargo on June 3 at WS 77.5, according to shipbrokers including P.F. Bassoe in Oslo.

``That's just one ship'' and so not necessarily an accurate reflection of levels that will be arranged by other owners, said Christian Avantz Grastvedt of Oslo-based shipbrokers Johan G Olsen.

VLCCs are booked about a month in advance and charterers have about 24 hours to cancel contracts.

The International Energy Agency, an adviser to 26 oil- consuming nations, cut its 2006 global demand estimate by 1.5 to 84.83 million barrels a day because of lower-than-expected consumption in the U.S. and Russia.

``Mild temperatures and high prices weighed on demand in most key consuming areas,'' the Paris-based IEA wrote today in a monthly report.

At rates of WS 65.8, owners of modern VLCCs can earn about $27,800 a day for the 39-day round trip between the Persian Gulf and South Korea, based on a formula by R.S. Platou, an Oslo- based shipbroker, and Bloomberg bunker prices. The calculation is after shipowners have paid costs such as fuel and port fees.

Frontline Ltd., the world's biggest oil-tanker company by capacity, said it needs $29,500 a day to break even on each of its VLCCs.

Freight derivatives for VLCCs on the Persian Gulf-to-Japan route rose for May contracts and fell in June, according to International Maritime Exchange AS, or Imarex, in Oslo.

Forward Freight Agreements, or FFAs, on the so-called TD3 route for April traded at WS 77, up 3 points, or 3.9 percent from yesterday's close, Imarex said. June contracts were at WS 88, down from WS 84.

Derivatives, such as FFAs, are financial obligations whose value is derived from indexes or interest rates or underlying assets such as debt, equity, commodities or currencies.

To contact the reporter on this story: Grant Smith in London at Gsmith52@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net


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