Monday, 28 May 2012

Better times ahead for VLCCs

A Bloomberg reports says that VLCC's may do much better going forward thanks to an increase in Atlantic-Asia movement added to the ongoing contraction in U.S. demand. London based shipbroker Clarkson says that VLCC earnings have shot up more than 30 percent this year already to $41,295- and an average of $37,933- albeit amidst high volatility. This will be good news for the many tanker operators - including large companies like Frontline- that have struggled over the last few quarters.

Bloomberg says that the biggest hedge fund in shipping is turning bullish on VLCCs after four years thanks to the fact that 'the U.S. push toward energy independence provides China with a greater share of global crude supply'. The Chinese economy, growing at three times the U.S. rate, has seen demand for tankers jump 39 percent in three years. At the same time, the U.S. push for energy independence (that it last enjoyed in 1952) has seen demand incrementally drop. Nett result: longer voyages that mean more profits for large-tanker owners. 

Hong Kong-based Tufton Oceanic agrees, saying VLCCs will do much better in the coming years.  Positive results will be felt as early as this year, for example with Frontline, the operator of 42 VLCCS, that may well reduce losses to $54.1 million compared to more than $529 million in 2011, a survey conducted by Bloomberg says. Tufton's Vergottis is advising investors to buy stock in companies that own VLCCs instead of the smaller Suezmax and Aframax tankers.

The U.S., with domestic output increasing, will net-import 1.4 million barrels a day of fuel by 2020, says Citigroup, down from almost 9 million barrels a day last year- the lowest since 1999. Another additional factor is the shooting up of domestically produced natural gas demand in the U.S. at the expense of oil. 

Oslo based Arctic Securities thinks that China will overtake the U.S. as the biggest customer for tankers in 2013; the country meets less than half its demand from domestic sources. The consequences of this changing scenario are already being felt, with pressure coming on smaller tankers that operate from West Africa or South America to Europe and the U.S. Larger vessels are required for the passage to China, and economies of scale favour the VLCCs here. Vergottis thinks that about 700,000 barrels a day has shifted from the intra- Atlantic trade onto the Asia-Atlantic route. 

Clarkson reports that Suezmax rates have fallen because of shifting demand. Even though VLCC rates are rising, the broker says, they are still below the 10-year average of $56,666- and way below the $97,154 average of 2008. 

“Increasing self-sufficiency in U.S. energy diverts more crude to China from the Atlantic just as long as China’s own use keeps growing,” Simon Newman of ICAP Shipping International Ltd. told Bloomberg. “More Atlantic- to-Asia business is definitely one of our factors in the market recovery going forward.”

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