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Tankers Poised for Worst Year in Decade as U.S. Refineries Close: Freight

By Isaac Arnsdorf - Jan 16, 2012 7:01 PM ET

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Tankers Poised for Worst Year in Decade on U.S. Crude

Teekay Shipping Corp. via Bloomberg

Teekay Shipping Ltd.'s European Spirit suezmax oil tanker is seen in this undated company photo.

Teekay Shipping Ltd.'s European Spirit suezmax oil tanker is seen in this undated company photo. Source: Teekay Shipping Corp. via Bloomberg

Suezmaxes, hauling about 1 million barrels of oil, are poised for their worst year in more than a decade as the biggest contraction in U.S. East Coast refining in at least 20 years means less cargo on their largest trade route.

The ships, about 50 percent of the size of supertankers, will earn $15,188 a day this year, 12 percent less than in 2011 and the lowest since at least 1997, according to the median of 10 analyst estimates compiled by Bloomberg. Investors may profit from that prediction by selling forward freight agreements, traded by brokers and used to bet on future transport costs, which are anticipating an average of $17,088, according to data from London-based Marex Spectron Group Ltd., which handles the contracts.

Rates are dropping for a second year as a capacity glut is compounded by declining demand on the industry’s busiest route. East Coast refineries, which rely on West African oil, are closing at the fastest pace since at least 1992 because they can’t compete with Midwest rivals using cheaper domestic crude, data compiled by Bloomberg Industries show. The West Africa-to- U.S. route accounts for about 14 percent of suezmax cargoes, Clarkson Plc (CKN), the world’s biggest shipbroker, estimates.

“For suezmaxes, the story is going to be the disappearance of demand on the U.S. East Coast,” said Olivier Jakob, the managing director of Zug, Switzerland-based research company Petromatrix GmbH, who has worked in oil for more than 17 years. “West African production is more likely to find a home in Asia and get shipped there on larger vessels designed for the trade.”

American Tankers

Suezmax rates fell 42 percent last year to an average $17,227

Sandefjord, Norway-based Nordic American Tankers Ltd. (NAT), which operates 20 of the vessels, had a $47 million net loss last year and will report a loss of $33.6 million for 2012, according to the average of four analyst estimates compiled by Bloomberg.

ConocoPhillips (COP), the third-largest U.S. oil company, and Sunoco Inc. said last year they would sell three refineries in Pennsylvania, accounting for about 50 percent of capacity in the Northeast. Two are already shut and the third may be closed if a buyer can’t be found. West Africa supplied 77 percent of the three plants’ crude imports, according to Energy Department data.

West African supply is priced off Europe’s Brent crude, which traded last year at an average premium of 17 percent to West Texas Intermediate, the U.S. benchmark. The premium widened from 0.9 percent in 2010 as U.S. production rose to an eight- year high, Energy Department data show.

North American Consumption

The slump in cargoes to the U.S. is exacerbating a capacity glut in shipping. The suezmax fleet will expand 11 percent this year, London-based Clarkson estimates. That compares with a 1.4 percent gain in global oil demand predicted by the Paris-based International Energy Agency.

North American consumption will slide 0.6 percent. The region accounted for 34 percent of suezmax cargoes in 2011, according to Clarkson.

While West African oil exports will rise 6.5 percent to 4.43 million barrels a day this year, a higher proportion will go to Asia on very large crude carriers, which carry about 2 million barrels, according to David Wech, an analyst at JBC Energy GmbH, a Vienna-based research company. In addition to declining U.S. demand, European processors are resuming imports from Libya, where former leader Muammar Qaddafi was ousted in October, he said.

Libyan cargoes typically move on smaller aframax vessels, Jakob of Petromatrix said. Aframaxes accounted for 76 percent of the 49 tankers booked to load crude in Libya since in September, according to data from Poten & Partners, a New York-based shipbroker.

Nuclear Program

Demand for suezmaxes may exceed analysts’ expectations should tensions in the Persian Gulf worsen. Iran has threatened to close the Strait of Hormuz, the transit point for about 20 percent of the world’s oil, should Western nations embargo its crude over the country’s nuclear program. Consumers would have to buy supply from further away, tying up tankers for longer and reducing available fleet capacity.

Frontline Ltd. (FRO), whose fleet includes 16 suezmaxes, said oil companies and traders are already seeking to ship more supply from northern Europe, the Caribbean and Libya in response to the Iranian threats, according to an e-mail from Jens Martin Jensen, the Singapore-based chief executive officer of the company’s management unit, on Jan. 12. About 17 million barrels of oil pass through the Strait of Hormuz each day.

Northbound Traffic

Suezmax rates in the single-voyage market rose 18 percent to $34,367 this year, in part because of delays caused by bad weather in Turkey’s Bosporus and Dardanelles straits, transit points for crude moving from the Black Sea region to the Mediterranean. Waiting times northbound through the lanes averaged 10 days this month, from six in December, according to GAC Shipping Turkey, a maritime agent.

Rates could also beat analyst forecasts should owners respond to the slump in rates by scrapping or idling more vessels or canceling orders for new ones, according to New York- based Dahlman Rose & Co. An average 102 suezmaxes were anchored last year, compared with 56 in 2008, ship-tracking data compiled by Bloomberg show.

Ship owners are also slowing vessels to use less fuel, their biggest cost. The average suezmax sailed at about 9.1 knots in December, compared with 10.4 knots two years earlier, data compiled by Bloomberg show. Reduced speeds means journeys take more time, effectively cutting the fleet’s capacity.

Owners will still face a glut. The suezmax fleet expanded 22 percent since the start of 2008, a year in which charter costs averaged $73,863 a day, according to data from Redhill, England-based IHS Fairplay and Clarkson. Outstanding orders at yards are equal to 23 percent of existing capacity, IHS data show.

Iron Ore

The glut extends to other merchant ships, which carry about 90 percent of world trade, according to the Round Table of Shipping Associations. Rates for VLCCs (TNNGSD) averaged 73 percent less last year while those for capesizes, carrying mostly iron ore and coal, dropped 53 percent, according to data from the London- based Baltic Exchange, which publishes freight costs along more than 50 maritime routes.

Shares of Nordic American Tankers plunged 54 percent last year before rallying 23 percent this year in New York trading. The company can withstand the slump because its ships need $11,000 a day to break even, Chairman Herbjorn Hansson said in an e-mailed response to questions. It trades in the single- voyage market rather than on longer-term contracts at fixed rates, which are typically less volatile, because that has been a more profitable strategy in the past three decades, he said.

“The underlying fundamental problem for suezmaxes is too many vessels and weak demand,” said Axel Styrman, an analyst at Carnegie ASA in Oslo whose recommendations on the shares of shipping companies returned 6.5 percent in the past three months. “It’s no party in the tanker market for anyone.”

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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Wednesday, February 1, 2012