Bloomberg News

Iran Oil Sanctions Boosting Returns for Nordic American: Freight

October 09, 2012

Iran Oil Sanctions Boosting Returns for Nordic American

Shippers are now using Suezmaxes because they can deliver directly to refineries. Source: Teekay Shipping Corp. via Bloomberg

European sanctions on buying oil from Iran are turning into a windfall for owners of Suezmax tankers, shipping the most cargoes in at least nine years as Saudi Arabia and Iraq increase supply.

Rates for the vessels, which can sail fully loaded with 1 million barrels through the Suez Canal to destinations in the Mediterranean, will rise 61 percent to an average of $19,000 a day this quarter, the median of six analyst estimates compiled by Bloomberg shows. Shares of Nordic American Tankers Ltd. (NAT:US), which operates a fleet of 20 carriers, will gain 33 percent in 12 months, based on the average of seven forecasts.

Saudi Arabian output is now within 1 percent of a record and Iraq is pumping the most since 2000, compensating for Iran, once OPEC’s second-biggest producer, which is exporting about 50 percent less oil than last year. The 27-nation European Union imposed an embargo in July over Iran’s nuclear program. The extra cargoes are helping to diminish a glut of Suezmaxes that caused earnings for the ships to drop 59 percent this year.

“The canal trade is becoming a new mainstay,” said Jeff McGee, the head of marine research and consulting at Poten & Partners Inc., a shipbroker in New York. “There was a heavy appetite in the Mediterranean for Iranian oil, and now they have to get it from somewhere else.”

Suezmax earnings dropped to $11,810 this year, according to London-based Clarkson Plc, the world’s largest shipbroker. Forward freight agreements, handled by brokers and used to bet on future shipping costs, anticipate a fourth-quarter average of $13,034, based on data from Marex Spectron Group, which handles the contracts.

Discharging Cargoes

While Suezmaxes can travel through the Suez Canal fully loaded, very large crude carriers cannot. Iran typically favored using the larger tankers, discharging cargoes into a pipeline running alongside the canal. The oil would then be picked up by smaller vessels at the other end for deliveries throughout the Mediterranean. Shippers are now using Suezmaxes because they can deliver directly to refineries.

Shipments from the Persian Gulf to Europe accounted for 64 percent of growth in Suezmax cargoes last quarter, according to Poten. The ships carried 42 million barrels of oil through the 120-mile canal in the period, from 22 million a year earlier, the broker estimates. Global monthly bookings averaged 178.3 million barrels this year, the most since at least 2004, Poten data show.

Demand Growth

NITC, the Tehran-based tanker company, operates 25 VLCCs and nine Suezmaxes, according to its website. One of its VLCCs called at Egypt’s Red Sea terminal of Ain Sukhna last quarter, from 11 a year earlier, ship-tracking data compiled by Bloomberg show. Iran exported about 1.15 million barrels a day last month, compared with an average of 2.4 million last year, data compiled by Bloomberg show.

The increase in cargoes for Suezmaxes isn’t completely erasing the glut, with the fleet’s capacity projected to expand 8.9 percent this year, the most since 1977, Clarkson estimates. That compares with anticipated demand growth of 2.4 percent. The $19,000 predicted for the fourth quarter is still below the $23,700 that owners need to break even on a five-year-old vessel, according to Pareto Securities AS, an Oslo-based investment bank.

Owners ordered too many ships after rates jumped as high as $155,000 in 2008. The fleet grew 33 percent since the end of that year, according to data from IHS Inc. Outstanding orders at shipyards are equal to 19 percent of existing capacity, more than for any other type of tanker, figures from the Englewood, Colorado-based research company show.

Energy Agency

Global growth in demand for crude is stalling as the economic recovery weakens. The International Energy Agency cut its world consumption forecast six times this year and expects European usage to contract 1.4 percent in 2013. The 17-nation euro area’s economy won’t expand again until the second quarter as governments seek to tackle the debt crisis, according to the median of 24 economist estimates compiled by Bloomberg.

The glut in Suezmaxes extends to most other types of commodity shipping. VLCC earnings plunged 63 percent to $11,519 a day this year, Clarkson data show. That’s less than the $23,900 that Frontline Ltd., the biggest operator of the vessels, says it needs to break even. Rates for Capesizes, hauling coal and iron ore, dropped 57 percent to $10,414 a day, according to the Baltic Exchange in London, whose data are used as benchmarks for about 75 percent of commodity cargoes.

Smaller Ships

Oil companies favor Suezmaxes for the journeys to Europe from the Persian Gulf because they cost about 14 percent less than VLCCs. Shipping a barrel of Persian Gulf oil to the Mediterranean on a Suezmax costs $1.27, compared with $1.47 on a VLCC, data compiled by Bloomberg show. The smaller ships can also call at more ports, with just three in Europe that regularly receive supertankers.

The EU imported 452,000 barrels a day from Iran in the first half of 2011, the equivalent of about 14 Suezmaxes a month, U.S. Energy Department data show. All shipments halted from July 1 under sanctions designed to pressure Iran into halting its nuclear research, which the EU and U.S. say is aimed at creating an atomic weapon. The government in Tehran says it is for civilian purposes.

The extra Persian Gulf cargoes for Suezmaxes are helping to compensate for declining imports into the U.S. from West Africa. Supplies of U.S. oil are the highest since 1996, diminishing the country’s need to buy African crude. U.S. imports from Angola and Nigeria averaged 660,000 barrels a day this year, the lowest since 1986, Energy Department data show.

West Africa

The oil is going to Asia instead and shippers are favoring VLCCs over Suezmaxes because the additional journey length makes the larger tankers more economical. Asian importers will buy 1.59 million barrels from West Africa this month, compared with 1.51 million a year ago, according to loading programs obtained by Bloomberg.

Nordic American, based in Hamilton, Bermuda, will report a net loss of $33.3 million next year, narrowing from $44.9 million in 2012, the mean of seven analyst estimates shows. Shares of the company dropped 20 percent to $9.56 this year in New York trading and are projected to reach $12.71 in 12 months. Chief Executive Officer Herbjorn Hansson declined to comment.

Shares of Teekay Corp. (TK:US), which operates 25 Suezmaxes, rose 21 percent to $32.29 in New York this year and will advance to $35.25 in a year, the average of eight estimates shows. The Hamilton-based company also operates other vessel classes, with Suezmaxes accounting for about 17 percent of its combined capacity.

While Clarkson expects global demand for Suezmaxes to expand 2.4 percent this year, it is also projecting a 17 percent gain in Middle East shipments to the Mediterranean.

“Some of the refineries that used to be supplied by Iran cannot take VLCCs or don’t want to,” said Olivier Jakob, the managing director of Petromatrix GmbH, a research company based in Zug, Switzerland. “This issue of replacing Iranian barrels is supporting Suezmaxes.”

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net


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Companies Mentioned

  • NAT
    (Nordic American Tankers Ltd)
    • $7.82 USD
    • -0.13
    • -1.66%
  • TK
    (Teekay Corp)
    • $57.3 USD
    • -0.22
    • -0.38%
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