OPEC’s pledge to maintain production quotas will sustain a record supply of oil cargoes in the Persian Gulf, giving ship owners the confidence to demand more money after charter rates plunged 76 percent in 11 weeks.
Rates for very large crude carriers, each hauling 2 million barrels, tumbled to $9,710 a day since April 2 amid speculation that slumping oil prices would spur producers to cut back. OPEC instead left output targets unchanged on June 14. Returns will average $18,000 in the third quarter, the median of eight analyst estimates compiled by Bloomberg show. That’s more than twice the $8,536 anticipated by forward freight agreements, traded by brokers and used to bet on future costs.
The Organization of Petroleum Exporting Countries, supplier of 40 percent of the world’s oil, refrained from cutting output after a decline of more than 10 percent in prices for the first time in a decade, helping to shore up the recovery. The group’s Persian Gulf members, led by Saudi Arabia, are shipping the most cargoes ever, diminishing a glut of tankers in the region to the lowest in at least three years, data compiled by Bloomberg show.
“The decision to maintain quotas is clearly a positive for owners’ sentiment,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo whose recommendations on shipping stocks returned 24 percent in the past year. “Two weeks ago, most were probably anticipating a slump in cargoes. This will make them think twice about taking ever-lower rates.”
Returns on the industry’s benchmark route from Saudi Arabia to Japan rose as high as $41,093 this year as record demand from Asia lengthened voyages, effectively curbing fleet capacity. The current rate is 21 percent lower than at the start of the year, according to data from the London-based Baltic Exchange. That’s below the $24,100 that Frontline Ltd., the largest VLCC operator, says it needs to break even.
OPEC pumped 31.6 million barrels a day in May, 1.6 million more than the limit set at the 12-member group’s last meeting in December, data compiled by Bloomberg show. Saudi Arabia produced 9.9 million barrels a day, the most since 1980, seeking to drive prices below $100 a barrel in response to economic growth slowing from China to Europe.
Brent crude declined 24 percent to $96.28 a barrel since March 1 on the ICE Futures Europe exchange in London. The retreat of almost $30 equates to a saving of about $2.63 billion a day for the global economy, based on last year’s average consumption of 88 million barrels estimated by BP Plc.
The Persian Gulf nations of Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates produced 22.2 million barrels a day in April, the most since at least 1962, according to data compiled by Bloomberg. Single-voyage bookings of VLCC cargoes from the region averaged 132 a month this year, the most ever, according to Galbraith’s Ltd., a shipbroker in London.
The increase in Persian Gulf oil may end up hurting tanker rates because it means Asian buyers will find more supply closer to home, rather than relying on producers in the Atlantic region, said Simon Newman, an analyst at ICAP Shipping International Ltd. in London. A journey from Saudi Arabia to China’s northeast Qingdao port takes about 26 days, compared with 44 days from Nigeria, data compiled by Bloomberg show.
Asian importers are scheduled to take 57 West African cargoes this month, the fewest since December, according to surveys of traders and an analysis of loading programs by Bloomberg. Shipments have dropped for four consecutive months. The decline drove more vessels into the Persian Gulf to compete for business, Arctic Securities’ Stavseth said.
OPEC’s efforts to maintain production may be undermined by a European Union ban on Iranian crude exports from July 1. The 27-nation EU says Iran’s nuclear program is aimed at producing atomic weapons, while the government in Tehran defends it as being for civilian purposes. Exports, which already dropped by 500,000 barrels a day this year, may decline another 29 percent to a daily 1.2 million barrels after the embargo takes effect, London-based Barclays Plc estimates.
Demand for crude may weaken as economies slow, with Commerzbank AG anticipating a second-half glut of 1 million barrels a day should OPEC keep producing at the same rate. The 17-nation euro area’s economy will contract 0.4 percent this year, the median of 30 economist estimates compiled by Bloomberg showed. China grew 8.1 percent in the first quarter, the slowest pace in almost three years.
Countries may instead stockpile crude, seeking to boost reserves as prices decline and sustaining demand for tankers. China, the biggest destination for VLCCs, accumulated a surplus of about 90 million barrels of oil in the first five months of the year, government data show. U.S. inventories of 384.4 million barrels are the highest in more than two decades, according to Department of Energy data.
Declining oil prices also reduce ship owners’ fuel bills, their single biggest operating expense. The price of bunkers, or vessel fuel, slid 19 percent from a record set on Jan. 31 to $598 a metric ton in Singapore, the world’s largest refueling port, data compiled by Bloomberg show.
A rebound in rates combined with cheaper fuel will help Hamilton, Bermuda-based Frontline narrow its net loss to $20.8 million this year from $529.6 million in 2011, according to the mean of 15 analyst estimates compiled by Bloomberg. Shares of the company rose 1.7 percent to 25.91 kroner in Oslo trading this year and will decline to 24.83 kroner in 12 months, the average of 16 forecasts shows.
VLCC rates rose as high as $229,000 in 2007, spurring owners to embark on a building program that created too much capacity. Similar gluts exist across most types of commodity shipping, with rates for Capesizes hauling iron ore and coal slumping 88 percent this year, according to the Baltic Exchange, which publishes costs along more than 50 maritime routes.
The global fleet of VLCCs increased 17 percent since the end of 2008, according to data from IHS Inc., a research group based in Englewood, Colorado. The glut may now be easing, with the surplus capacity in the Persian Gulf averaging 9.8 percent this year, according to weekly surveys of shipbrokers, owners and traders by Bloomberg. That compares with an average of 16 percent since the surveys began in March 2009.
“The trickle of VLCCs is being absorbed because we’ve got record cargoes being shipped from the Middle East Gulf,” said Nigel Prentis, director of research at HSBC Shipping Services Ltd., a London-based shipbroker and consultant. “Whatever crude oil OPEC produces will be shipped and consumed, or it will be shipped and placed into storage.”