(Bloomberg) In 2010 the number of new tankers coming online and the tankers coming off storage leases could combine to cut tanker rates by 25%. That would drop them to something in the $30,000 per day range from their current $40,212 rate. Bloomberg got this data from surveying 15 analysts, traders and shipbrokers.
We know from past reports that as many as 190 tankers were booked for oil storage duty over the last year with 168 still holding stored oil in November as institutions profited from buying oil cheaply at the front month rate and selling the longer dated futures for a profit. That number has declined significantly to around 160 at present. Most of those are in European waters with the rest spread around the world. Bloomberg points out that the ships coming off storage duty would create a line 26 miles long if lined up end to end. That is a lot of capacity! Those 160 ships represent 23.8 million tons or 5.9% of the tanker fleet. That exceeds the prior record of 19.5 million tons used for storage in 1981.
A broker with 37 years experience at Clarkson Plc, the world's largest shipbroker, said, "the tanker market has been defying gravity." Once new builds begin to deliver and the oil storage trade ends there will be a tremendous glut of tankers.
The futures trade should be unwinding very quickly. The spread between the first and sixth month contracts was 23% back in early 2009. That has shrunk to only 4% today. That is not a lot of margin compared to the amount of risk exposure.
Analysts believe crude oil storage will shrink to 40 million barrels in six months and 19 million barrels in a year assuming current price trends remain solid. Currently there is an estimated 50 million barrels in floating storage. Oil product storage is currently 98 million barrels and will shrink to 29 million in a year.
Tufton Oceanic Ltd expects the tanker fleet to grow by 12% in 2010. Five percent will be ships returning from storage duty and 7% from new construction. The monster tanker rates in 2008 caused every tanker company to order new ships to fill the expected increase in crude demand. When demand collapsed many of those ships were canceled but quite a few were left on order. Those start delivering in 2010 and accelerate late in the year.
Jonathan Chappell, an analyst at JP Morgan has an "underweight" rating on Overseas Shipholding Group (OSG) and Frontline (FRO). Overseas Shipholding is the largest U.S. based tanker owner. Frontline needs a day rate of $32,900 for its super tankers to break even.
The only good news on the horizon is the decline of the single hull tanker. A global ban on single hull tankers begins in 2010 and will reduce supply especially if tanker rental rates are dropping. Owners will elect to scrap the tankers to preserve the rates on the newer ships.
The single hull tankers are normally smaller than the giant double hull tankers being produced today. There may be a temporary decline in capacity but it will be brief. The key is returning oil demand. Until the global economy recovers and oil demand finds some traction the tanker owners may be looking at a bleak 2010. With rates falling under $20,000 in 2009 there will be some lasting scars. Most of the tanker companies reported losses and most reported cancellations of some new ships. Until analysts can determine the number of ships cancelled and the number to be delivered I would be cautious about going long the tanker sector.