Biggest Ship Hedge Fund Turns Bullish on Supertankers: Freight
The biggest hedge fund in shipping is turning bullish on the largest oil tankers for the first time in four years as the U.S. push toward energy independence provides China with a greater share of global crude supply.
The U.S. is importing the least in 13 years as China buys more than ever, lengthening voyages for tankers and effectively reducing the fleet’s capacity, government data show. Very large crude carriers, each hauling 2 million barrels, will earn $40,000 a day this year, 81 percent more than in 2011, said Andreas Vergottis, the Hong Kong-based research director of Tufton Oceanic Ltd., which manages about $1.3 billion of assets.
Chinese demand for tankers jumped 39 percent in the past three years to fuel an economy expanding at more than three times the pace of the U.S. The buying extends from Angola to Venezuela, changing trade patterns and boosting demand for the largest vessels. The rate projected by Vergottis is almost twice the $20,946 anticipated by forward freight agreements, traded by brokers and used to bet on future costs.
“No one has yet woken up to this new regime,” he said. “The reduction in U.S. oil imports is actually good, because VLCCs will take that oil to Asia long-haul from the Atlantic.”
VLCC earnings climbed 31 percent to $41,295 this year, according to data from London-based Clarkson Plc, the world’s largest shipbroker. Rates are volatile, swinging from $49,104 to $7,254 last year and averaging $22,137. Frontline Ltd. (FRO), the Hamilton, Bermuda-based operator of 42 VLCCs, will narrow its loss to $54.1 million this year from $529.6 million in 2011, the mean of 17 analyst estimates compiled by Bloomberg shows.
Investors may profit from the switch in trade by buying stock in operators of VLCCs and selling shares of companies owning smaller Suezmax and Aframax tankers, Vergottis said. He declined to name specific companies.
The U.S. will import a net 1.4 million barrels a day of crude and other fuels by 2020, Citigroup Inc. estimates. Daily purchases averaged 8.9 million barrels in 2011, the least since 1999, Energy Department data show. Domestic output rose 2.7 percent to the highest since 2003. The last time the U.S. achieved energy independence was in 1952, when exports of coal, oil and gas exceeded its imports, according to Energy Department data compiled by Bloomberg.
U.S. oil consumption is also being constrained by a surge in domestic natural-gas supply to the most since at least 1936, driving futures traded on the New York Mercantile Exchange down 82 percent in less than four years. Chemical makers are favoring feedstocks from the fuel over oil after crude prices more than doubled since the end of 2008. U.S. oil demand is contracting for a second year, the International Energy Agency estimates.
That contrasts with a predicted 4.1 percent advance in Chinese consumption, taking the gain since 2009 to 23 percent, according to the Paris-based IEA. The additional 1.8 million barrels a day is equal to an extra 330 VLCC cargoes a year, or 59 percent of the existing global fleet of 558 vessels.
The rate of growth may slow in line with China’s gross domestic product, which expanded 8.1 percent in the first quarter, the slowest pace in almost three years. Premier Wen Jiabao set an annual target of 7.5 percent in March, the lowest since 2004. The nation’s crude demand advanced 1.5 percent in 2008 amid the global recession, the least in almost two decades, data from London-based BP Plc show.
While VLCC rates are rising, they would still be below the 10-year average of $56,666, according to Clarkson. Rates averaged $97,154 in 2008, spurring owners to order new ships that created a glut just as the global economy contracted. The fleet expanded 15 percent since the end of 2008, and outstanding orders at ship yards are equal to 11 percent of existing capacity, according to data from IHS Inc., a provider of shipping research.
Other types of commodity carriers are also mired in gluts. The Baltic Dry Index, a reflection of the cost of hauling coal and iron ore, declined 35 percent this year, data from the London-based Baltic Exchange show. The Lloyd’s List-Bloomberg Top 50 Shipping Index Value of the 50 largest companies operating everything from oil tankers to container ships declined 25 percent in the past year.
Shares of Frontline will reverse this year’s 21 percent advance and drop 19 percent in the next 12 months, according to the average of 18 analyst estimates compiled by Bloomberg. They exceeded the analysts’ average price forecast in December. Vergottis’s prediction of $40,000 a day is almost double the $21,000 median of 12 analyst estimates compiled by Bloomberg.
Rates have yet to signal any slowdown in demand, averaging $37,933 so far this year, according to Clarkson. That’s a function of China going further to meet its demand. Shipments from Angola and Nigeria are about 26 percent higher than a year ago, compared with a 48 percent decline in cargoes to the U.S. The journey from Nigeria’s Bonny terminal to Galveston in Texas takes about 20 days, compared with 34 days to the port of Qingdao in northeast China.
China will overtake the U.S. as the biggest customer for all sizes of tankers in 2013, according to Arctic Securities ASA, an Oslo-based investment bank. While China will account for 11 percent of global demand this year, it is using about 14 percent of the world’s VLCCs, ship-tracking data show. That’s because it can only meet 43 percent of consumption from domestic supply, IEA data show.
The change in VLCC trading patterns is hurting the smaller tankers that traditionally hauled oil from West Africa, Venezuela or the North Sea to the U.S., Vergottis said. More of those cargoes are now going to Asia and buyers favor larger vessels for such journeys because they are more economical.
The shift is drawing about 700,000 barrels a day of intra- Atlantic trade onto the Asia-Atlantic route, Vergottis estimated. Rates for Suezmaxes, carrying about 1 million barrels, dropped 17 percent this year, Clarkson data show.
“Increasing self-sufficiency in U.S. energy diverts more crude to China from the Atlantic just as long as China’s own use keeps growing,” said Simon Newman, the head of tanker research at ICAP Shipping International Ltd. in London. “More Atlantic- to-Asia business is definitely one of our factors in the market recovery going forward.”
To contact the reporter on this story: Isaac Arnsdorf in London at email@example.com
To contact the editor responsible for this story: Alaric Nightingale at firstname.lastname@example.org
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.