The fastest expansion in oil cargoes since 2004 is exceeding demand and filling up storage tanks from Egypt to Japan, creating a glut that threatens to reverse the biggest gain in shipping rates in five years.
Tankers will be carrying 488.8 million barrels by April 14, 3.9 percent more than the week earlier, estimates Oil Movements, which has tracked cargoes for 25 years. Rates for very large crude carriers, each holding 2 million barrels, will drop 58 percent to average $19,750 a day, the median of six analyst forecasts compiled by Bloomberg shows. Shares of Hamilton, Bermuda-based Frontline Ltd. (FRO), the largest operator, will fall 46 percent in 12 months, the average of 19 predictions shows.
Shipments accelerated as buyers sought to expand reserves on mounting concern that Middle East supply will be disrupted by conflict over Iran’s nuclear program. Rising stockpiles are coming at a time of slowing growth in China and a contraction in Europe, which together account for about 33 percent of demand. The global market is getting as much as 2 million barrels a day more than it needs, Saudi Arabian Oil Minister Ali al-Naimi said March 20.
“A ship owner would rather see strong consumer demand, and that we do not have,” said Olivier Jakob, the managing director of Petromatrix GmbH, a research company based in Zug, Switzerland, who has worked in oil markets for more than 17 years. “It’s more of a short-term phenomenon. There’s an effort to rebuild stocks in case something happens with Iran, but consumption is actually quite weak right now.”
VLCC rates climbed 67 percent to $46,811 this year, the biggest first-quarter gain since 2007, according to data from Clarkson Plc (CKN), the world’s largest shipbroker. Shares of Frontline (FRO), which says its biggest ships need $23,900 to break even, advanced 68 percent to 42.93 kroner in Oslo trading. The stock will decline to 23.03 kroner in 12 months, according to the average of the analyst estimates compiled by Bloomberg.
Saudi Arabia, the world’s biggest oil exporter, increased production by 18 percent since the end of 2010 to compensate for declines in Libyan and Iranian supply, data compiled by Bloomberg show. Inventories in Saudi Arabia as well as those controlled by the kingdom in the Netherlands, Egypt and Japan are full, al-Naimi told reporters in Doha, Qatar, on March 20.
A record 392 VLCCs were booked for single-voyage cargoes this year, from 330 a year earlier, according to Galbraith’s Ltd., a London-based shipbroker. Storage tanks in Rotterdam, Europe’s biggest oil-trading port, may be as much as 90 percent full, compared with 70 percent to 80 percent normally, estimates PJK International BV, a Breda, Netherlands-based research company. U.S. crude stockpiles climbed 9 percent to a six-month high since mid-December, Energy Department data show.
The anticipated decline in tanker rates may be postponed should consumers continue to replenish stockpiles. Saudi Arabia still has 2.5 million barrels a day of spare output capacity, al-Naimi said last month. That’s about 100,000 barrels less than Iran’s exports in November, the Paris-based International Energy Agency estimates.
Iranian shipments slumped to 2 million barrels a day in February and may decline by another 1 million barrels once European Union sanctions are fully enforced in July, David Fyfe, the head of the IEA’s market and industry division, said in an interview March 14. Iran has threatened to disrupt shipping through the Strait of Hormuz in the Persian Gulf, the transit point for about 20 percent of the world’s crude.
The U.S. and its allies are seeking to squeeze Iran’s economy in response to the country’s nuclear program, which they say is aimed at producing atomic weapons. The government in Tehran, contending with four sets of United Nations sanctions, says the project is for civilian purposes. U.S. President Barack Obama cleared the way last month for sanctions aimed at banks in countries that import Iranian oil.
Demand for tankers may also be sustained by shipments to China, the world’s largest energy consumer and the biggest destination for crude shipments on VLCCs, ship-tracking data compiled by Bloomberg show. China will add 210 million barrels to its strategic stockpiles this year, equal to more than 100 VLCC cargoes, Clarkson Capital Markets estimates.
While stockpiles are building and demand growth is slowing, oil prices remain high historically. West Texas Intermediate, a global benchmark, rose 38 percent to $104.55 a barrel in New York trading since Oct. 4. Prices averaged $84 over the past five years, data compiled by Bloomberg show. Petroliam Nasional Bhd., Malaysia’s state oil company, expects a drop as prices above $100 restrain demand, Chief Executive Officer Shamsul Azhar Abbas said in a March 30 interview.
Western governments may tap oil from strategic reserves to drive prices lower, with French Prime Minister Francois Fillon saying March 29 that they were nearing an agreement. Any such release would likely drive tanker rates lower because it would curb demand for cargoes. VLCC earnings slumped 46 percent in July when the IEA coordinated the last such action.
Cargo demand may also weaken as refineries in the Northern Hemisphere carry out maintenance before the summer, according to Oslo-based Arctic Securities ASA. Second-quarter VLCC rates weakened in nine of the past 10 years, according to Clarkson data. China, the U.S. and Japan are the three biggest destinations for laden VLCCs, data compiled by Bloomberg show.
China’s consumption growth will slow to 3.9 percent this year, from 4.9 percent in 2011, the IEA estimates. The country is targeting economic expansion of 7.5 percent, the lowest rate since 2004, Premier Wen Jiabao said March 5. The economy grew 8.9 percent in the fourth quarter, the least in 10 quarters.
Traders are booking tankers earlier than they need the cargoes because of concern that Middle East supplies may be disrupted, according to Dahlman Rose & Co. The decline in Iranian exports is driving Asian consumers to seek oil from West Africa, lengthening journeys for tankers and effectively reducing the fleet’s capacity, Arctic Securities estimates. A voyage to Tokyo from Nigeria takes about 36 days at 12.5 knots, compared with 22 days for the route from Saudi Arabia.
That’s temporarily curbing a glut of shipping capacity, which expanded 17 percent since the end of 2007, data from Redhill, England-based IHS Fairplay show. Owners ordered too many vessels after rates rose as high as $229,484 that year. The fleet will increase another 6.5 percent this year while demand advances 3.6 percent, Clarkson (CLRK) estimates.
Similar gluts exist in the fleet carrying coal, grain and other dry-bulk commodities. Rates for Capesizes, which haul iron ore, slumped 80 percent this year, according to data from the London-based Baltic Exchange, which publishes rates for more than 50 maritime routes. About 90 percent of trade moves by sea, the Round Table of International Shipping Associations says.
Frontline will report a loss of $55.5 million for this year, the median of 19 analyst estimates show. The company split into two separate entities in December to withstand the worst rout in rates since 1999. Two of 26 analysts covering the company and tracked by Bloomberg advise buying the shares.
Owners will probably speed up ships in response to the jump in demand, effectively increasing the fleet’s capacity, said Ole Stenhagen, an analyst at SEB Enskilda in Oslo. That would reverse a strategy adopted over the past several years in response to the slump in rates. VLCCs proceeded at 10.1 knots last month on average, from 11.9 knots two years earlier, vessel-tracking data compiled by Bloomberg show.
“If the market starts to worry less about sanctions on Iran, that would have a negative effect,” said Martin Korsvold, an analyst at Pareto Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 25 percent in the past two years. “We’re not talking about any fundamental shift here. Like with the other rallies, it will taper off pretty quickly.”
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