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Nov. 22 (Bloomberg) -- The biggest rebound in oil-tanker rates in almost two years is already being threatened by signs the surge may spur ships to speed up, increasing vessel supply and undermining the rally.
The largest tankers cut their speed to an average of 10 knots in October, from 10.8 knots a year earlier, after eight months of unprofitable rates, data compiled by Bloomberg show. A one-knot change adjusts the fleet’s capacity by 5.8 percent, Oslo-based Arctic Securities ASA estimates. Frontline Ltd., the biggest operator of the ships, rose 19 percent in two weeks as rates approached break even and tumbled 44 percent today after saying it may run out of cash.
“A few extra knots will put a brake on this rally and any others that come within the next few years,” said Erik Nikolai Stavseth, an analyst at Arctic Securities who advised selling Frontline a year ago, since when the stock slumped 90 percent. “We are now moving into the earnings territory where owners have less incentive to keep speeds low.”
Daily rates that reached $28,829 on Nov. 18 last exceeded the $30,200 that Frontline said today it needs to break even in March, according to data from London-based Clarkson Plc, the world’s biggest shipbroker. Owners are managing the biggest fleet in at least three decades, in a year in which global oil demand growth is forecast by the International Energy Agency to slow to 1 percent from 3.1 percent. Shipping companies started cutting speeds to reduce fuel costs and trim capacity.
Forward freight agreements, traded by brokers and used to bet on future transport costs, indicate current rates won’t last. Contracts for the benchmark Saudi Arabia-to-Japan route are trading at $10,218.83 for 2012 and $14,933.63 for 2013. That’s still better than this year’s average of $7,956.37, according to data from the London-based Baltic Exchange, which publishes rates along more than 50 maritime routes. Very large crude carriers haul about 20 percent of the world’s oil.
Equity investors are anticipating narrowing losses for shipping companies next year. Frontline, based in Hamilton, Bermuda, will report a loss of $84.7 million for 2012, compared with a loss of $129.8 million for this year, the mean of 19 analyst estimates compiled by Bloomberg show. The company may need more funding in 2012 and there are “significant uncertainties” about meeting some loan terms at the end of this quarter, Frontline said in a statement today.
General Maritime Corp., which operates a fleet of 29 tankers, filed for bankruptcy court protection from creditors on Nov. 17.
Owners ordered the most ships in about four decades in 2007 and 2008, when rates rose as high as $229,000. The fleet expanded 11 percent to 555 vessels since the end of 2008 and orders at ship yards are still equal to almost 15 percent of existing capacity, according to data from Redhill, England-based IHS Fairplay. Each carrier can hold about 2 million barrels of oil, more than France consumes daily.
Any increase in speed may be partly offset by strengthening demand. Oil consumption will average a record 90.5 million barrels a day next year, compared with 89.2 million this year, the Paris-based IEA said in a report Nov. 10. China will use 5.3 percent more, three times the growth predicted globally. The Asian nation is the top destination for crude shipments on VLCCs in terms of volume, according to Bloomberg ship-tracking data.
The rally in rates may also be sustained by older ships being scrapped. The cost of a 15-year-old tanker fell 48 percent to $23.5 million this year as scrap values rose 3 percent to $17.25 million, the narrowest gap in at least five years, according to data from Clarkson and Simpson, Spence & Young Ltd., the second-largest shipbroker. Owners may break up 5 percent of the fleet within 18 months, the most in nine years, Clarkson Capital Markets LLC estimates.
Rising energy costs may encourage owners to keep tanker speeds low. Ship fuel, known as bunkers, jumped 30 percent to $663.27 a metric ton this year, according to data compiled by Bloomberg from 25 ports. An empty vessel burns about 90 tons of bunkers a day when traveling at 14 knots, according to Riverlake Shipping SA, a broker in Geneva. That can drop to 25 tons when sailing at 10 knots, Frontline said in March, implying a saving of about $43,600 a day.
Growth in Chinese oil demand won’t be replicated elsewhere. Japanese consumption will increase 0.7 percent next year, less than half the global pace of 1.5 percent, the IEA estimates. The Saudi Arabia-to-Japan voyage is the world’s biggest tanker route. North America will use 23.39 million barrels a day, 0.5 percent less than this year.
West Texas Intermediate, a benchmark crude grade, for delivery a year from now is trading at $97.21 a barrel, 0.2 percent less than now. That suggests ship-fuel costs are unlikely to decline any time soon, boosting costs for owners and eroding margins.
Bank of America
All six members of the Bloomberg Tanker Index of equities will report a loss this year, according to analyst estimates compiled by Bloomberg. The gauge slumped 52 percent this year, compared with a 13 percent decline in the MSCI All-Country World Index of equities. Treasuries returned 9.2 percent, a Bank of America Corp. index shows.
The decline in tanker earnings is also being reflected in other types of shipping. Rates for capesizes hauling iron ore averaged $14,214 a day this year, below the $20,000 they need to break even, Baltic Exchange data show. An index reflecting charges for six types of containers fell 39 percent since the start of April, data from the Hamburg Shipbrokers’ Association showed. The shipping industry handles about 90 percent of world trade, according to the Round Table of Shipping Associations.
The vessel speeds compiled by Bloomberg refer to monthly averages and exclude anchored vessels. Ships with designations such as “restricted maneuverability” are counted, potentially lowering the average.
The rally in rates may also spur tanker owners to reactivate vessels that have been idled, or laid up. An average of 143 very large crude carriers were anchored last month, compared with 75 three years ago, according to ship-tracking data compiled by Bloomberg. Owners can cut operating costs to as little as $2,000 a day from $12,000 by anchoring ships, according to Hamilton, Bermuda-based BW Group Ltd., which was idling three vessels last month.
“The minute things pick up, ships speed up and return from lay up, dropping levels again,” said Simon Newman, a London- based analyst at ICAP Shipping International Ltd., a unit of the biggest broker of transactions between banks. “In a market this sensitive and damaged, it would knock rates.”
--Editors: Dan Weeks, John Deane.
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