The first quarter produced some of the highest tanker rates in over a year but that is all about to change. Shipping costs in Q2 could fall to $28,758 per day for a VLCC compares to $49,908 in Q1 according to a recent Bloomberg survey.
There are multiple problems facing the tanker industry. For Q2 there is the normal refinery switch over period where they switch from winter blends and products to summer blends and perform needed maintenance ahead of the summer refining season. This means there is a sudden shortage of loads of both crude oil and refined products.
There are also fewer tankers being rented to store crude since the contango has shrunk significantly. Tankers being used to store crude hit a high of 168 in November and fell to 104 by February. These are expected to decline to less than 75 this quarter.
Global oil demand is expected to decline in Q2 by .5% to 85.9 million barrels per day. This is down from 86.3 million barrels for the first quarter. Japan Energy Corp said it planned to cut refining quantities in Q2 by as much as 17% as it handled the maintenance shutdown.
Conoco Phillips and Ineos Group Holdings Plc plan to shut or partially close refineries in the U.K. this quarter according to data compiled by Bloomberg.
Frontline, the largest tanker operator said it needed $30,800 per day to break even on its operating costs. That does not bode well for Frontline with prices on April 1st already in the $28,000 range. That $28,758 median price in the Bloomberg survey is still 24% higher than the full year 2009 average of $23,130. Rates fell so low that some clients have to pay additional money to subsidize the fuel costs.
Another problem is the most extensive shipbuilding program in over 30-years. When rates soared to $177,000 a day in 2008 because of a tanker shortage, everyone in the industry raced out to order new tankers. A total of 54 were delivered in 2009 and the largest number since 1976. According to Bloomberg another 71 ships will deliver in 2010. Offsetting the new deliveries to some extent will be the retiring of the older single hulled tankers that are being outlawed for environmental concerns.
Still it is going to be a rough year for tanker companies since crude demand is not expected to increase much until the summer of 2011. Excess inventories already in storage plus weak demand is going to make finding a profitable load a tough task.
Ironically Frontline (FRO) is right at a 52-week high. Shorts anyone?
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter