Are Tanker Rates Too High?

Tanker rates have continued to rise against all expectations into the summer months, doubling the cost of transporting oil this year, but a lull is expected. By May brokers expected key Middle Eastern two million barrel VLCC rates to plateau, but instead they kept on climbing.

Worldscale 90 to the U.S. Gulf is now the norm for modern ships, up from W85 a month ago and W42.5 at the beginning of the year.

The irresistible rise has more than doubled the cost of transporting oil to about $2.10 per barrel, from 99 cents at the beginning of January, according to broker Mallory, Jones, Lynch, Flynn & Associates (MJLF).

Likewise, eastbound rates have jumped to W112.5 for Japan from W100 and W52.5, respectively, taking the shipment price per barrel to $1.65 from 75 cents in early January.

But brokers expect a downturn over the next two weeks and into the summer on the basis that they believe OPEC will not agree to release a large amount of extra oil when it meets later in June.

Shipping markets would recover again around October, the thinking goes, as winter demand kicks in and further possible OPEC output relaxation occurs. "VLCCs will come off quite soon," one broker said, citing sufficient available vessels to cope with falling demand over the summer and the start of Asian refinery maintenance programs.

He saw rates to Japan falling to about W100 in the short term and around W90 by mid-summer. Westbound levels would drop to about W75.

"U.S. demand is more for gasoline than crude at the moment," he said following a period of restocking from the Middle East and the Caribbean which has rocketed rates there for 70,000 ton loads to a current W240 ($1.35 per barrel) from a seasonally expected W160.

"I expect VLCC rates to dip over the next two weeks," another broker said, but added that if OPEC agreed to allow extra production due to current high oil prices, then shipping rates could stabilise again.

Shipping supply has been squeezed this year, precipitated largely by the Erika disaster, which has taken older tonnage out of the mix, as oil companies have been under intense public pressure to hire more modern tonnage.

Extra output has resulted in total crude liftings out of the Persian Gulf and Red Sea, increasing to 194.8 million tons by the start of June, from 162.4 million tons in the same period last year, according to Marinav Shippign & Trading.

The total number of ships fixed has risen to 938 from 784 in the same period of 1999, the broker said.

But a current lull in fixing for June - 89 vessels for the month at the end of last week - suggests a possible downturn in demand, Marinav says.

Normal seasonal variations would suggest this year should see about 110 fixtures for the month down from this year's monthly high of 129 scored in May (118 in 1999).