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Tanker owners bullish and investors bearish as earnings fall

Tanker owners bullish and investors bearish as earnings fall
For the first time so far this year, Gulf-Japan spot rates for VLCCs dipped W10 to below W55, following a return to reality after some days in the sun in early January. The current spot rate is at its lowest in six months, amounting to around $38,000 per day.

The story was similar on other trades, with VLCCs bound from the Gulf to Europe and the US dropping around 20%, and similar results for suezmaxes trading between West Africa and the US and Med.

Whether this is a temporary blip or a structural decline remains to be seen, but if Frontline ceo Robert MacLeod is to be believed, this volatility is all part of the plan – which is why his company took the opportunity to lock in 88% of its Q1 VLCC trading days at an $73,100 per day.

“The tanker markets have corrected downwards over the recent weeks and mild winter and refinery maintenance are contributing factors, but overall demand for tankers remains good,” said MacLeod in its Q4 2015 earnings call. “The market will be volatile, like it was in 2015, but we believe that the fundamental outlook of both the crude and products markets are good, and we expect the markets to perform well going forward.”

An area of concern is the swelling orderbook for tankers, with 136 VLCCs due for delivery over the next four years.  Deutsche Bank analyst Amit Mehrotra, citing orderbook totals, downgraded ratings for Euronav and Teekay to “hold” from “buy”, and raised his firm’s tanker market threat level to "red,” from its earlier "flashing yellow light".

“The high volume of crude in the markets keeps congestion and delays high in ports and places around the world and creates what we call forced storage,” said MacLeod. “As for contango driven storage, we have not seen much being done lately due to the strong freight markets. With the recent fall in the spot markets, we expect more inquiries. The current breakeven rate for a VLCC to store crude is around $35,000 per day and it is quite volatile.”

Anxieties about future capacity are only exacerbated by misery in containers and dry bulk. “With what is happening in other shipping sectors, the yard capacity in Asia 2018 onwards is virtually unlimited,” MacLeod commented.

"In 2015, 85% more dirty tankers were ordered compared to 2014," oil and tankers analyst Sevita Kondyliou, of Affinity Research, told Seatrade Maritime News. "This came as little surprise as the historic ordering rate is highly correlated with that of freight rates. In other words, too often long term investment decisions have been influenced by short term market movements.

"At the moment, shaky fundamentals are playing their part with overcapacity in a nevertheless active market dragging down earnings," continued Kondyliou. "Fifty-seven vessels are expected to be delivered this year, while only 26 vessels in the current fleet have been in service for more than 20 years.

"US domestic oil production is expected to decrease by around 600,000 barrels per day by the end of this year, while production from Chinese high-cost domestic oil fields will also decrease. As a result, imports will have to rise to meet domestic demand assuming it does not fall. China will also continue building strategic petroleum reserves, which will account for an estimated 25 to 35 VLCC cargoes per year. Thus, our expectations are for VLCCs to earn around $40,000 per day in 2016."