Oil Stored at Sea Washes Out Rallies

Oil Stored at Sea Washes Out Rallies
Firms Sell Cargoes at Any Hint of Rebound, Flooding Market With Supply
Feb. 5th, 2009
WSL.online

By BRIAN BASKIN

NEW YORK -- Every time the oil market attempts to ignite a rally, an upsurge from the sea of crude stored on waterborne tankers snuffs it out.

The accumulation of oil held in "floating storage" gained speed in December, as available space in traditional onshore storage hubs dwindled due to excess supplies. This floating storage is now among the biggest impediments to oil prices recovering any of the ground lost over the past six months. Companies are quick to sell cargoes at the hint of a turnaround, unleashing a flood of oil onto the market.

More oil is being produced than recession-stricken economies need, and prices have fallen as the extra crude fills storage terminals world-wide. Crude-futures prices are down 72% from the record hit in July. Wednesday, light, sweet crude oil for March delivery settled 46 cents lower, or 1.1%, at $40.32 a barrel on the New York Mercantile Exchange.

The oil sitting at sea adds an extra layer of uncertainty about the supply overhang, which traders said must be whittled down for oil prices to rebound.

Tankers carrying up to two million barrels each aren't counted in official statistics. Ship trackers estimate that as many as 80 million barrels may be on the water, or more than twice the amount kept in the largest commercial storage center in the U.S., in Cushing, Okla.

"There's no database of ships sitting on storage right now. It makes it very, very difficult to speculate" on what is on the water, said one tanker broker.

The flexibility that comes with holding oil on a vessel is important for companies looking to quickly take advantage of a market where oil to be sold next month costs significantly less than a contract to deliver later in the year. The sheer amount of crude floating around prevents any permanent narrowing of that discount.

"You can almost describe it as an accordion effect," said Andy Lebow, senior vice president for energy at brokerage MF Global in New York. "For floating storage to come out you want to see these spreads tighten up. When the oil comes out ... [the spreads] widen."

Members of the Organization of Petroleum Exporting Countries are the only producers capable of and willing to quickly slow the flow of oil. The group has cut output by 3.1 million barrels a day since September, according to a Dow Jones Newswires survey.

OPEC's cuts haven't resulted in lower inventories. U.S. onshore oil stocks rose by 7.1 million barrels in the week ended Jan. 30, one of the largest single-week gains ever, according to the Energy Department.

Several OPEC members have raised the possibility of cutting production quotas again at the group's meeting in March if inventories remain elevated and prices stay depressed.

"OPEC will eventually win the battle, but what floating storage does is it delays the victory," said Michael Wittner, global head of oil research at Société Générale SA.

Frontline Says Fuel Costs May Spur Tankers to Slow

Frontline Says Fuel Costs May Spur Tankers to Slow
By Alaric Nightingale
July 14 (Bloomberg)

Frontline Ltd., the world's largest owner of supertankers, said a jump in fuel costs may spur owners to sail vessels more slowly to conserve energy, shrinking fleet supply and bolstering ship-rental rates.

The shipper and ``several major owners'' sailed 20 percent slower than normal toward the end of last year after ``low'' demand and record fuel costs hurt margins, according to a May 2 regulatory filing from the company. That cut fleet capacity by about 10 percent and was followed by the biggest two-month gain in freight rates in November and December for at least 16 years.

The possibility of slowing is ``soon again emerging,'' Jens Martin Jensen, Oslo-based interim chief executive officer of Frontline's management unit, said in an e-mail July 10. ``I believe all owners, including ourselves, are monitoring this on a daily basis.''

Supertankers, ships bigger than the Chrysler Building and designed to haul 2 million-barrel cargoes of crude, burn about 100 metric tons of marine fuel a day when sailing at full speed, according to Riverlake Shipping SA, Switzerland's biggest shipbroker. Marine fuel, or bunkers, advanced to a record $754.50 a ton in Singapore July 11, according to prices on Bloomberg.

Frontline fell 0.5 krone, or 0.2 percent, to 326.5 kroner ($64.25) as of 2:16 p.m. in Oslo trading, valuing the shipping line at 24.4 billion kroner. The shares earlier fell as much as 2 percent. The stock has gained 26 percent this year.

Supertanker owners trimmed about $20,000 from their daily fuel costs by slowing down last year, the May 2 filing said. Fuel now represents about 85 percent of daily costs, Jensen said.

Shipping Competitors

Frontline and its competitors sailed at about 12 knots last year, compared with 15 knots normally, according to the filing.

Supertankers are sailing close to their fastest speed for at least two months, according to data complied by Bloomberg.

The average VLCC is moving at 10.45 knots, 13 percent faster than on May 29 when they were traveling at 9.22 knots. The data include ships at anchor. Tanker rental rates are on course for a record year, earning about $107,000 a day, a Bloomberg survey of 13 analysts and brokers this month showed.

Sailing slower would help mitigate a fleet expansion that the International Energy Agency said July 1 will ``massively'' exceed growth in oil demand in the next two years.

Owners decided to slow down last ``autumn,'' Frontline Chief Financial Officer Inger Klemp said by phone July 10. The jump in ship-rental rates after that probably encouraged some to speed up again, she said.

Still, other owners may decide that current rental earnings are too good to sail slower, said Per Mansson, managing director of tanker broker Nor Ocean Stockholm AB.

``It won't happen,'' he said in an e-mailed note today. ``Owners cannot start giving away money in a market like this to improve things at a later stage.''

John Fredriksen

Billionaire Cashes In On Offshore Oil Rush
http://online.wsj.com/article/SB120700920323078811.html?mod=googlenews_wsj

With Supply Scarce, His Rigs Are Hot;
$600,000 Day Rate

By GUY CHAZAN
April 1, 2008

LONDON -- As a buccaneering oil trader, John Fredriksen shipped crude from trouble spots like Iran and used hardball tactics to build up the world's biggest tanker fleet. The son of a welder, this modern-day Onassis is now Norway's richest man, worth at least $7 billion.

He is also one of a new breed of entrepreneurs reshaping the oil business.

Mr. Fredriksen has amassed an array of state-of-the-art oil rigs capable of drilling in the world's deepest oceans. With production declining in mature basins like Alaska, the deep waters of the Gulf of Mexico and offshore Brazil and West Africa are oil's hottest real estate. But the rigs that can drill there are in short supply. That means contractors like Mr. Fredriksen can charge huge premiums for their services.

His success is part of a broader power shift from Big Oil -- the Shells, Exxons and BPs of the world -- to the oil-field-services sector. As they venture into ever harsher and more remote environments, the majors are becoming more reliant on these outside contractors -- geologists, well testers, seismic data experts and offshore drillers -- to find and extract their crude. The service companies are the new rule-setters in an increasingly costly game.

Helping to fuel their rise is a growing fear that the world's oil production may be about to plateau and decline. "Peak oil" anxiety has contributed to the steep increase in the price of crude, which has nearly tripled since 2004. Peak theory is now feeding into wider concerns that demand for all the world's resources -- not only oil but wheat, copper and other commodities -- is increasing faster than supply, creating new limits to global growth.

Mr. Fredriksen made an early bet many thought was insane. Three years ago, his company, Seadrill Ltd., broke one of the cardinal rules of the rig business. It ordered two "ultradeep water" rigs, capable of drilling in waters at a depth of at least 7,500 feet, for nearly $900 million -- on spec. It didn't have a single contract from an oil company to guarantee them.

"We didn't feel it was a risk," said Mr. Fredriksen, a 62-year-old with piercing blue eyes, elegantly attired in a blazer and cravat on a recent afternoon in his London office. "We knew there was a boom coming on."

There's no telling how long that boom will last. But Mr. Fredriksen sees years of strong demand ahead. The amount of oil pumped from deep-water fields will nearly double between 2005 and 2010 to about 11 million barrels a day, according to the U.S. Energy Information Administration. Douglas-Westwood, a consulting firm, says capital spending on deep-water oil will rise to $25 billion annually by 2012, nearly double the figure for 2003.

Yet there are only 39 rigs in the world capable of drilling in ultradeep water. Seadrill has four of them, with eight more under construction. While there are older companies that are bigger than Seadrill, few have such a modern fleet.

That gives Mr. Fredriksen enormous pricing power. His units are in such demand he can charge major oil companies nearly $600,000 a day to use them. Similar rigs were earning about $70,000 a day just five years ago. With leasing rates like these, a vessel that cost half a billion dollars to build can pay for itself in as little as four years.

The Oil Outsider

John Fredriksen was born in a working-class Oslo suburb in 1944. His humble background set him apart from Norway's blue-blooded shipping aristocracy -- men like Sigval Bergesen and Anders August Jahre, the Nordic equivalent of the Vanderbilts and Rockefellers. They, along with the tycoons of Greece and Hong Kong controlled the world of international shipping in the postwar years. "There was an Ivy League of shipowners -- the founding fathers of the business," says Boris Nachamkin, one of Mr. Fredriksen's first bankers. "He was the outsider."

His first job was as a shipping broker, running cargoes of fish from Iceland to Hamburg, Germany. After brief stints in Canada and New York, he moved to Beirut in the late 1960s. There he shipped crude out of Saudi Arabia and Iraq and sent back cargoes of refined products. He soon developed a firm grasp of the oil trade. "He knows how oil moves, who gets it when it's tight and when it's flowing quickly," says Morten Arntzen, another of Mr. Fredriksen's former bankers and later a business partner.

By the mid-1970s, shipping was in deep trouble. The 1973 Arab-Israeli war sent oil prices into orbit. Fuel consumption plummeted in the West, and demand for long-haul tankers collapsed. Many venerable shipping companies went bust in the slump and Norway's fjords were full of empty tankers. Mr. Fredriksen sensed an opportunity. He started leasing cheap ships and later buying many of them outright.

In the 1980s, Mr. Fredriksen was one of the few traders exporting Iranian oil during the Iran-Iraq war, shuttling tankers through the Persian Gulf from Kharg Island, a big oil terminal that was repeatedly targeted by Saddam Hussein's air force. Mr. Fredriksen says his tankers were hit three times by Iraqi missiles.

A noted reveler, he would often hold court throughout the 1980s at Oslo's fashionable Theatre Café. Locals nicknamed his regular table there Kharg Island.

"When he was traveling, he needed three brokers with him -- one recovering from the night before, one on duty and the other preparing for the next day," says Clarence Dybeck, a fellow shipowner from Sweden. "He had a tremendous capacity for work."

In the world of Norwegian business, he tended to keep a low profile. He never admitted to owning any ships, claiming instead to be acting on behalf of a group of unnamed investors. That was common in the industry, where shipowners could be held liable for wrecks and oil spills, says fellow Norwegian Tor Olav Troim, vice chairman of Frontline, Mr. Fredriksen's shipping company.

"I was more secretive" in those days, says Mr. Fredriksen. Domestic critics denounced him for shipping oil to South Africa, in defiance of the apartheid-era trade embargo. He says all Norwegian shipping firms did it.

In 1985, he moved to Cyprus, lured by lower taxes and the island's reputation as a shipping center. "It's almost impossible to do business in Norway today," he says, citing the tax regime and frequent regulatory changes. In 1986, the Norwegian authorities charged him with fraud, alleging that his tankers were found to have used customers' cargoes for fuel. Police raided his offices in Oslo, and he turned himself in a few days later. The main charges were later dropped and he paid a fine on a lesser charge. But the affair still rankles: It was motivated by "jealousy" of his success, he says.

Mr. Fredriksen's penchant for secrecy changed in 1996 when he bought Frontline, a publicly listed Swedish shipping company. It soon grew into a giant, and a key force in the consolidation of the fragmented shipping business. In 1996 he owned seven tankers. By 2001, Frontline had 70. The company today has the world's biggest tanker fleet, with 86 vessels.

Hardball Tactics

A year after he bought Frontline, he launched a hostile takeover bid for ICB Shipping, a Swedish tanker firm. His methods -- full-page ads in local newspapers, angry letters to ICB board members, pressuring shareholders -- shocked some Swedes. "No one had seen those sort of tactics before in Sweden," says Clarence Dybeck, the then head of ICB. "He could be quite brutal." After a grueling two-year battle, he finally won control of the company.

Mr. Fredriksen was meanwhile benefiting from big changes in the oil-shipping industry. After notorious oil spills like the Erika, a tanker which broke up off the coast of France in 1999, oil companies stopped chartering dangerous single-hull tankers. Such ships have a single outer shell between the oil and the ocean; double-hull tankers, which have an extra space between hull and storage tank, are considered safer. Shipowners who had invested in double-hulls cleaned up. John Fredriksen was one of them.

The tanker business was also coming out of its slump. Fields close to the big oil-consuming countries -- in the North Sea, Alaska and Mexico -- were declining. Crude was increasingly coming from faraway places like West Africa and the Middle East. China and India were emerging as major oil importers. Long-haul tankers were back in vogue. With his expanded fleet, Mr. Fredriksen cashed in on a freight market that was entering a new golden age. By 2001, the chartering rates paid by the oil companies to ship crude around the globe were the highest they had been in 30 years.

Already a billionaire, in 2002 he bought the Old Rectory, a mansion in London's ritzy Chelsea district, from the Greek shipping family of Theodore Angelopoulos, for £38 million (at the time, about $57 million), one of the highest prices ever paid for a London home. The house has a rich history: The Battle of Waterloo was planned in its garden.

He also continued to diversify. He currently has stakes in dozens of businesses, from shipping to fish farming to oil trading. His empire includes "dry bulk" ships, those that carry things like coal, steel and grain, as well as liquefied-natural-gas carriers and tugboats that supply offshore oil platforms. His company Marine Harvest is the world's biggest producer of farmed salmon. Among other investments: Aktiv Kapital, a buyer of distressed consumer debt, and Arcadia Petroleum, a big crude-oil trading firm.

A Big Rig Bet

One of his boldest moves, in terms of startup costs and the risk of failure, was into the drilling business. As oil prices began their ascent in 2003, contractors were putting in big orders for mobile drilling platforms that operate in shallow waters. But Mr. Fredriksen says his contacts in Asian shipyards told him the majors weren't investing enough in deep-water rigs.

Yet deep-water drilling's potential was clear: Offshore Angola, some companies drilling for crude had an unprecedented 95% "hit" rate, says Mr. Troim. Messrs. Fredriksen and Troim started ordering semisubmersibles, or "semis" -- one of the most advanced kind of floating rigs. In June 2005, a month after taking the newly created Seadrill public, they commissioned two semis, one for $394 million and another for $490 million. "Everyone was laughing at us at the beginning," says Mr. Troim. "We were Mr. Nobody."

Larger than a football field, semis are floating vessels, supported by big pontoonlike structures submerged below the sea surface, that can operate in waters up to 10,000 feet deep. Dynamic positioning -- a computer-controlled thruster system fed by data from satellites and transponders located on the seabed -- keeps them in place directly above the oil well. The price tag for such a vessel is now around $655 million.

Seadrill expanded aggressively, ordering new rigs and swallowing up competitors in a flurry of deal making. Its market value has grown from $200 million when it listed in 2005 to $10.5 billion today.

"Fredriksen and Troim move very fast," says Odd Harald Hauge, a Norwegian journalist who has written two books on Mr. Fredriksen. "They do deals on napkins."

A Wave of Mergers

One of their most daring acquisitions was of Smedvig ASA, a big Norwegian driller, in January 2006. Noble Corp., a U.S. rival, had taken a 30% stake in the company, but Seadrill snapped up shares and eventually forced Noble to sell out. "We bought that in a taxi in Seoul," says Mr. Fredriksen.

The revved-up drilling sector was being swept by merger fever. In July 2007, Transocean Inc. and GlobalSantaFe Corp., the world's two biggest offshore-drilling contractors by market value, agreed to an $18 billion merger. Seadrill itself has often been touted as a potential takeover target by a more established U.S. or Asian driller. Mr. Troim said it approached some U.S. rivals about a tie-up in 2006, but the talks went nowhere.

A merger would help solve one of Seadrill's key problems -- a lack of staff, especially engineers and drill operators who are in short supply. Seadrill has tried to deal with that by aggressively poaching managers and crews from its peers. The company recently hired one of Transocean's top executives to run its Houston office.

There are some worries the sector's boom may be unsustainable. Analysts fret that contractors may have ordered too many rigs, which will lead to overcapacity and a collapse in day rates. But others say high oil prices, which underpin the business, will stay lofty for years to come, and that with many rigs contracted out well into the next decade, the deep-water drillers have a bright future.

For the time being, the majors are in a bind. In the 1990s, when oil slumped to $10 a barrel, they aggressively cut costs, shed jobs and divested themselves of assets. When oil prices recovered, they often lacked personnel and equipment and were forced to outsource a lot of the work of drilling and extracting crude.

Some of the majors are now resorting to building their own, cheaper rigs. Royal Dutch Shell PLC has designed a new class of drilling vessel, the bully rig, which it says is suitable for both deep-water and arctic conditions and will cost 20% less to lease than the competition. But it will only take delivery of the first two in 2010.

Mr. Troim was recently in Houston meeting with potential customers: One person familiar with the talks said oil executives came away shaken by the sky-high rates Mr. Troim was demanding -- up to $600,000 a day. Mr. Troim says Seadrill's charges are typical for the industry, and the market can bear them. "It's been fun to see a company grow from two men and a dog to being a major player in this market," says Mr. Troim. "More fun than making money."

Write to Guy Chazan at guy.chazan@wsj.com

Oman to Spend $4 Billion on Shipping Fleet

Oman to spend $4bn on shipping fleet
by Luke Pachymuthu
Monday, 24 March 2008
ArabianBusiness.com

Oman's state shipping firm will spend up to $4 billion in the next three to four years to expand its fleet size, a senior company official said, part of the sultanate's efforts to upgrade its oil industry.

Oman Shipping Company (OSC) is looking to grow its fleet mainly to meet demand for energy transportation, Chief Financial Officer (CFO) Kuldeep Mathur told newswire Reuters in a recent phone interview.

"We are expanding the fleet with a view of the future demands for our export grade crudes and products," he said.


Part of OSC's multi-billion dollar expansion includes a recent order to build 10 Very Large Crude Carriers (VLCCs), Mathur said.

In February, OSC placed two separate orders with South Korea's Hyundai Heavy Industries Company, the world's largest shipbuilder, to build five supertankers, and with Daewoo Shipbuilding and Marine Engineering Company to build another five VLCC's. The deals were valued at about $770 million each.

OSC is in discussions with the National Iranian Tanker Company (NITC) on securing a long-term charter contract for at least five of the recently ordered supertankers, Mathur said.

"Yes, we are discussing the option with them, along with others, but we are not decided yet," Mathur said declining to offer details.

International pressure and the implementation of broad-based sanctions on Iran, led by the US, have made it difficult for the Islamic republic to access funding from financial institutions.

"Sleeving through Oman would make sense, because it allows for Iran to get around the issue of financing," said a Singapore-based sales and purchase shipping broker, referring to the practice when one firm with limited credit uses another with better credit to do a trade on its behalf for a fee.

NITC was not immediately available for comment.

The expansion planned by OSC, whose stakeholders are the Ministry of Finance and Oman Oil Company, is part of the sultanate's broader vision to upgrade its shipping and chartering sector and depend less on leased vessels.

Oman, like other Gulf states, is also trying to diversify its economy away from oil, which generates almost half its gross domestic product but is seeing declining production.

OSC boasts a current fleet size of seven liquefied natural gas (LNG) tankers and two clean tankers, with four oil tankers including a VLCC and Very Large Gas Carrier on the order book.

The CFO said part of the expansion plan included growing the company's clean tanker fleet, by adding between 15 and 20 refined product tankers.

"We are looking at new and considering buying second-hand clean product tankers as well... we have certain refineries in Oman and taking position on this to provide employment prospects for these vessels," Mathur said, without giving details.

Oman, which operates two refineries - Oman Refinery Company and Sohar Refinery Company with a combined capacity of more than 225,000 barrels per day (bpd) - is planning a third facility of about 300,000 bpd at the southeastern city of Al-Duqm.

The proposed refinery, part of the Duqm Refining and Petrochemical Complex and is due for completion in 2012, will have a significant refined product export slate, sources familiar with the project said.

"We should see more potential for export of light distillate products like naphtha and gasoline to support growing regional demand," Mathur said.

Financing for the company's fleet expansion could likely come via loan arrangements from the North Asian institutions, Japan Bank for International Cooperation, Korea Export Insurance Corporation (KEIC), or European banks BNP Paribas and Societe Generale, Mathur said.

"We have a very good relationship with several banks, and could look to either one to finance our expansion plans," he added.

He said the expansion would include some general cargo and multi-purpose vessels. The firm now operates two Supramax bulk vessels. (Reuters)

Persian Gulf Tanker Rates May Drop

Persian Gulf Tanker Rates May Drop as Refineries Delay Cargoes
By Alaric Nightingale
Dec. 20 (Bloomberg)

The cost of shipping Middle East crude to Asia, the world's busiest market for supertankers, may drop as oil companies resist paying record prices to hire ships.

Very large crude carriers, or VLCCs, are making about $300,000 a day on benchmark international trade routes to Asia, according to prices compiled by Bloomberg. In 2004, the previous record year, they made $290,000 a day, according to London-based shipbroker Galbraith's Ltd.

Charterers who hire ships for oil companies may now be ``holding back if possible for fear of paying too much,'' Charlie Fowle, a director at the company, said in an e-mailed note today.

Sinochem Corp., China's biggest chemicals trader, hired the tanker C. Champion at a rate of 285 Worldscale points, according to a report today from Oslo-based shipbroker PF Bassoe AS. That's 10 percent below the London-based Baltic Exchange's benchmark rate of 317.66 points for voyages to Asia.

Higher Rates

Flat rates for ships loading next year are higher than those in 2007 because of record refueling costs. The Baltic Exchange's assessments reflect 2007 flat rates until the end of the year.

At 317.66 Worldscale points, owners of double-hulled very large crude carriers, or VLCCs, can earn about $297,0777 a day on a 39-day round trip from Saudi Arabia to South Korea, based on a formula by R.S. Platou, an Oslo-based shipbroker, and Bloomberg marine fuel prices.

That means costs for Japanese refineries fell 0.4 percent to $7.42 a barrel from $7.45 a barrel on Dec. 18.

There are 23 modern two-hulled tankers available for hire within the next 30 days, according to a report today from Paris- based Barry Rogliano Salles. There were 40 such ships competing for cargoes two months ago, according to the shipbroker.

Teekay's Spin-Offs

Teekay Tankers' Taste of Success
Ruthie Ackerman
12.13.07
Forbes.com

Teekay Corp. thinks the whole is less than the sum of its parts.

The energy-based maritime conglomerate has spun off yet another one of its major operations. On its first day of trading Thursday, shares in Teekay Tankers (nyse: TNK) gained 4.0%, or 78 cents, to $20.28. Its initial public offering price of $19.50 per share was at the high end of the anticipated range.

The offering was of a 40% interest in Teekay Tankers; parent Teekay Corp. (nyse: TK) is retaining 60%.

Teekay also has spun off Teekay Offshore Partners (nyse: TOO), which specializes in fleets for storage of oil for offshore units, and Teekay LNG Partners (nyse: TGP), which operates vessels that carry liquified natural gas.

Since it began its spin-off program in May 2005, Teekay stock is up 28.5%. Teekay LNG is up 33.0% since it came public in May 2005, and Teekay Offshore has risen 20.2% since its debut in December 2006. By contrast, an index of energy-transport companies compiled by Revere Data has increased only about 11% since May 2005.


Charles W. Rupinski, an analyst at Maxim Group, said Teekay's tanker business is its most volatile one, and management probably thought it was dragging down the valuation of the company as a whole.

Even though spot rates are very high right now and Teekay has a lot of spot exposure, going forward the tanker business is facing many challenges and investors are likely to be cautious, Rupinski said.

Indeed, although the offering did well, investors put a significantly lower value on the spin-off than the parent. Using the pro forma earnings for last year provided by the Teekay Tankers offering document, the spin-off was valued at 9.2 times last year's income while the parent fetched 12.7 times last year's reported profit. The spin-off is planning to return a high proportion of its earnings to shareholders by way of dividends.

Teekay Tankers is getting nine double-hull Aframax-class tankers, which will be used for spot charters and short- or medium-term fixed-rate time-charter contracts. At the end of June, the ships, whose name derives from the acronym for average freight rate assessment and which are smaller than the oil supertankers that cannot make it into some harbors and canals, were worth about $275 million

Teekay Tankers raised about $180.8 million from the IPO after expenses and commissions. The proceeds will be used to partially repay Teekay for the inital fleet.

In addition, Teekay will give Teekay Tankers the opportunity to purchase up to to four Suez-max class tankers within 18 months. These ships are built to fit through the Suez Canal.

Analysts Trash Tanker Stocks

Frontline, Teekay Crash Nears Amid Tanker Glut, Crude
By Alaric Nightingale and Todd Zeranski
Oct. 22 (Bloomberg)

The record increase in oil prices and the unprecedented number of new tankers transporting crude is a stock market crash waiting to happen.

That, at least, is the growing consensus among analysts who say the widening gap between West Texas Intermediate crude and the rate for supertankers shipping Middle East oil to Asia means industry titans Frontline Ltd., Overseas Shipholding Group Inc. and Teekay Corp. have unsustainable valuations.

The Bloomberg Tanker Index has risen 44 percent in the past two years, even as freight rates sank 49 percent. The price of marine fuel, the biggest cost for shipowners, has advanced 44 percent in that time, reaching a record $446.50 a metric ton on Oct. 17. The number of ships available is close to a record.

``It doesn't look good at all,'' said Andreas Vergottis, who helps manage $1.2 billion at Isle of Man-based Tufton Oceanic Ltd., the world's biggest hedge fund dedicated to shipping. ``We've got a wall of worry and a wall of new buildings flooding the market ahead of us.'' He said the stocks are 30 percent overvalued.

Frontline, the world's biggest operator of supertankers, reached a record low of 3.80 kroner in December 1998. The stock this year has gained 30 percent and was trading 2.1 percent lower at 233 kroner as of 12:03 p.m. in Oslo. The gain has helped make Chairman John Fredriksen into Norway's richest man, with a fortune that Forbes magazine estimates at $7 billion.

Too Many Ships

The looming decline for tanker stocks is a legacy of the biggest tanker construction program in history. Teekay, Frontline and Overseas Shipholding in 2004 earned a combined $2.2 billion, triple the level of a year earlier, because of a jump in world oil demand. They used that profit to help order 522 tankers from builders including Hyundai Heavy Industries Co. and Samsung Heavy Industries Co.

The size of the oil tanker fleet expanded 3.8 percent this year, overwhelming the 1.7 percent increase in crude oil demand estimated by the International Energy Agency. The fleet will increase by as much as 32 percent during the next five years, estimates Lloyd's Register-Fairplay, the company that assigns ship registration numbers.

Tankers are being built at the fastest rate ever, according to Clarkson Plc, the world's largest shipbroker, which began collecting industry data in 1852.

Tankers capable of hauling 1.2 billion barrels of crude, equal to about two weeks of global oil consumption, will enter service in the six years that end in 2009, according to Clarkson. The total is 1 percent higher than the previous record, from the 1970s.

Straight to Scrapyards

Ship demand at that time slowed, and newly built tankers were sent straight to demolition, said Per Mansson, a shipbroker for Nor Ocean Stockholm AB, a former second mate and executive at Frontline before Fredriksen bought the company. Some tankers hauled one cargo from Asian shipyards to northwest Europe, only to be laid up in the fjords of Norway, he said.

``It got so bad that, on one voyage from Sweden to Venezuela, we turned the engine off and went with the current down to the Caribbean because fuel was so expensive,'' said Mansson, 55. ``We got a telegram from Exxon to go at 7 knots, so we just floated down.''

The Bloomberg Tanker Index has gained 32 percent this year, outpacing a 5.8 percent increase in the Standard & Poor's 500 Index, and a 6.4 percent drop in U.S. government 10-year bonds. Oil is up 41 percent and reached a record $90.07 a barrel in New York Mercantile Exchange trading on Oct. 19.

Teekay has appreciated 32 percent this year to $57.72 on the New York Stock Exchange, valuing the Bahamas-based company at $4.3 billion. Overseas Shipholding, based in New York, has advanced 27 percent to $71.56.

Demolitions

Shares of Frontline are heading for an 11 percent decline, according to Henrik With, the DnB Nor Markets analyst whose advice on Frontline gave clients a 91 percent gain in the past year. Teekay may decline 26 percent, he forecasts. Among all analysts tracked by Bloomberg, at least 70 percent say the two stocks aren't worth buying.

Frontline Chief Executive Officer Bjoern Sjaastad in an interview said oil carriers will be sold and converted to haul bulk commodities, easing the ship surplus. Also, the speed of demolitions ``will go a lot faster than many people think,'' bolstering freight rates, he said.

Teekay spokeswoman Alana Duffy said the company can't comment before an earnings release at the end of the month. Overseas Shipholding spokeswoman Jen Schlueter said CEO Morten Arntzen wasn't immediately available for an interview.

Time Charters

Shipowners can protect against a drop in the single-voyage market by leasing vessels on so-called time charter contracts that can last months or years, while paying a fixed amount.

About 40 percent of Frontline's ships had such protection for 2007 and 2008, according to an Aug. 22 statement. Seventeen percent of Teekay's 111 carriers had such contracts, while none of Overseas Shipholding Group's biggest carriers had such deals.

Teekay protects itself against increases in the cost of marine fuel. Frontline and Overseas Shipholding don't. The industry's pricing mechanism, known as Worldscale, is updated once a year to reflect changing fuel prices.

Demand for single-voyage charters is ``stuck in a rut'' because the soaring price of oil is squeezing refiners and discouraging purchases, said Omar Nokta, an analyst at Dahlman Rose & Co. in New York. He advises investors hold their Frontline shares.

Losing Money

Refineries are losing 63 cents on each barrel they process in Europe, compared with a profit of $7.86 in May, because crude costs are rising faster than prices for gasoline and diesel, according to data compiled by Bloomberg.

``All this weakness is stemming from refineries not being in the market,'' said Nokta, whose call on Frontline during the past year led to a 35 percent profit for investors.

Analysts value shipping stocks in relation to the cost of second-hand tankers. From December 2003 through July 2007, those ship values more than doubled, according to data from the London- based Baltic Exchange. Since then, ship prices have dipped, exchange data show.

``Asset values will fall and dividend payments must be cut,'' said DnB Nor Markets' With. ``Too much fleet capacity coming on stream will put pressure on earnings from 2008 to 2010.''

Freight Rates

Falling freight rates and record fuel costs have given shipowners their longest string of losses in five years, according to Citigroup Inc., the third-largest lender to the shipping industry. So-called very large crude carriers, which transport about 2 million barrels, are losing more than $13,000 a day in the market for day-to-day charters. Shipowners are spending more on fuel and debt payments than they collect in rent.

Suezmax vessels, the biggest tankers that can navigate Egypt's Suez canal while full, are losing more than $10,000 a day. Owners of aframaxes, 600,000-barrel carriers that usually haul crude within the same continent, are losing about $13,000 a day, Citigroup estimates.

Thirty of the largest tankers may be sold and converted into carriers for grain, coal and iron ore, markets where freight rates are at a record high, Frontline's Sjaastad said.

``For the next 15 months, there isn't going to be substantial additions to the fleet, you'll have depletions going to dry bulk,'' said Dahlman Rose's Nokta. ``If you have the demand push, then they'll be able to absorb the vessels. Demand would keep a natural floor.''

China's economy is growing at almost 12 percent a year and India's by 9.3 percent, spurring demand for oil, steel, iron ore and coal.

No Cargoes

Some 50 supertankers have failed to find cargoes in the past month, and vessels will compete for consignments in November, extending declines for owners, forecasts Paris-based shipbroker Barry Rogliano Salles.

Relief may not come until 2010, when the United Nations' shipping agency, the International Maritime Organization, adopts a ban on single-hull tankers, those at greatest risk of spilling oil in the event of an accident. Once the policy takes full force five years later, the only tankers plying the oceans must have two steel hulls.

``Everything now is about what happens between today and 2010,'' says Ole Stenhagen, an analyst at SEB Enskilda in Oslo. ``We are in for a real dip in rates and a rough environment.''

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anj25lHh6K4E

Aframax Rates Rise

Caribbean Tanker Rate Increases on Competition From Europe
By Todd Zeranski
Oct. 18 (Bloomberg)

The rate to transport oil from the Caribbean advanced, spurred by higher prices in European shipping markets.

``Mediterranean activity has increased, so some owners are moving there,'' said Mike Jedlicke, a broker at Dietze & Associates LLC in Wilton, Connecticut. ``That's thinning out'' the number of available vessels, straining Caribbean supply.

Stronger Aframax bookings in the Mediterranean and the Black Sea forces Caribbean-area charterers to pay higher rates to keep vessels in the region.

The average Aframax rate advanced 15 points, or 11 percent, to Worldscale 155. WS 155 is equal to about $20,325 a day, after expenses such as fuel and port fees.

The rate fell to WS 92.5 on Sept. 11, the lowest since 2001, according to Bloomberg data. Rates increased 22 percent yesterday and are up 48 percent this week.

Malaysia's Eagle Anaheim Nereo is scheduled to reach its Houston destination on Oct. 21, according to Bloomberg data.

The Caribbean is the world's third-largest Aframax-tanker market after the Mediterranean and Southeast Asia. An Aframax is the most common tanker used to move oil in the region.

Persian Gulf Tanker Rates May Rise as Fuel Prices Crimp Income
By Alaric Nightingale
Oct. 18 (Bloomberg)

The cost of shipping Middle East crude to Asia, the world's busiest market for supertankers, may rise for an eighth day as soaring refueling prices continue to crimp income from rentals.

Record marine fuel, or bunker, costs mean some owners, who rented extra tankers at fixed prices anticipating rising demand in the northern hemisphere winter, may be losing about $30,000 a day when they lease out those ships in the day-to-day, or spot market, Charlie Fowle, a director at London-based shipbroker Galbraith's Ltd., said by phone today.

``The bunker factor at the moment is dramatic,'' Fowle said. ``Just to get the same return, owners need 10 to 20 percent more'' from the oil companies who book their ships.

Hyundai Merchant Marine, a South Korean shipowner, hired the tanker Hebei Spirit at a rate of 59 Worldscale points, according to a report from Athens-based Optima Shipbrokers today. That's 3.5 percent above the London-based Baltic Exchange's benchmark assessment of 57.03 Worldscale points for cargoes to Asia.

Hebei Spirit should normally cost less to hire than the benchmark because it's fitted with one steel hull separating its cargo from the ocean. The exchange's assessment also includes carriers with two steel hulls that cut the risk of an oil spill in the event of an accident and usually have better engines.

At 57.03 Worldscale points, owners of double-hulled very large crude carriers, or VLCCs, can earn about $20,024 a day on a 38-day round trip from Saudi Arabia to South Korea, based on a formula by R.S. Platou, an Oslo-based shipbroker, and Bloomberg marine fuel prices.

A week ago, the same rate of 57.03 points would have earned $3,500 a day more when the cost of bunkers was 9 percent cheaper.

IEA Monthly Oil Market Report September

Crude tanker rates, already at multi-year lows on certain routes in early August, remained very weakthroughout the month. Low oil-in-transit volumes and the resultant vessel surplus continue to keep VLCC rates unseasonably low. An expanding tanker fleet has been a bearish influence this year and while scrapping activity has apparently remained modest, conversions to more profitable dry bulk carriers have risen.

VLCC rates from the Middle East Gulf to Japan languished just above the $7/tonne mark for the first half of August. This reflected weak tanker fundamentals, even by summer standards. A temporary $2/tonne mid-month jump to over $9/tonne resulted from greater chartering activity on the route, coinciding with reports of an upturn in September OPEC sailings, especially on eastbound routes. Rising OECD refinery throughputs from October, after autumn maintenance, also offered potential support for near-term demand for crude transportation. Still, Japan-bound rates faded to finish August at $8.50/tonne. VLCC rates from the Middle East Gulf to the US Gulf were equally weak in August, remaining flat at around $14/tonne. This compares with rates of $25/tonne at the end of August 2006; a busy period of chartering before OPEC cuts were implemented.

Crude tanker rates from West Africa fell to their lowest point for two years, in $/tonne terms, by early September. Suezmax rates to the US Atlantic finished near $7/tonne, down by $2/tonne on the month. Transatlantic VLCC rates fell by even more. Despite greater demand for eastbound voyages, regional vessel demand has otherwise been undermined by recent refinery outages and approaching maintenance. Caspian production maintenance will reduce September BTC (Baku-Tbilisi-Ceyhan) export volumes, potentially adding downside to Mediterranean Suezmax rates in the coming weeks.

Clean tanker rates broadly fell in August, with the exception of LR1 routes (75,000 tonnes) from the Middle East Gulf to Japan. Rates on this trade rose by $2/tonne on the month to end at over $21/tonne in early September. Support came from firm naphtha demand from North Asian petrochemical plants, plus reports of reduced regional vessel availability following some gasoil arbitrage trade from Asia to Europe. In Western markets, transatlantic 35,000-tonne clean rates to the US drifted from a mid-month peak of $16/tonne to around $13/tonne, despite improving arbitrage economics at the end of August.

OSG Adds 4 Suezmax Tankers

OSG Adds New Tanker Class to Its Crude Oil Fleet with Four Suezmax Vessels
(BUSINESS WIRE)

Overseas Shipholding Group, Inc. (NYSE:OSG), a market leader in providing energy transportation services, announced today it has expanded its crude oil tanker fleet with the addition of four Suezmax vessels. The vessels complement OSG’s crude oil tanker fleet of ULCCs, VLCCs, Aframaxes and Panamaxes. Ranging in size between 120,000 and 200,000 deadweight tons (dwt), Suezmaxes offer greater port flexibility than VLCCs and better economies of scale than Aframax tankers. The addition of the vessel class to OSG’s fleet enhances its ability to offer customers a full range of vessel options when transporting crude oil throughout the world.

Mats Berglund, head of OSG’s Crude Oil Tanker Strategic Business Unit, commented, “OSG is now the only ship owner in the world that can offer customers service in all crude oil tanker segments as well as lightering. In addition, the vessels enhance our ability to gather market intelligence enabling us to better understand and respond to changes in the market and to better serve the needs of our customers.”

OSG has purchased, sold and bareboat chartered-back two Suezmax tankers from Double Hull Tankers, Inc. (NYSE: DHT). OSG expects to take delivery of a 2001-built 164,000 dwt vessel in December 2007 and the second ship, a 2000-built 153,000 dwt vessel, is expected to deliver to OSG in the first quarter of 2008. The vessels have been chartered for seven and 10 years, respectively.

OSG has time chartered-in two 156,000 dwt sister ships for three years. The vessels, currently under construction in China, are expected to deliver in the fourth quarter of 2008.

Persian Gulf Tanker Rates Rise Most in 20 Months

Persian Gulf Tanker Rates Rise Most in 20 Months; Demand Jumps
By Alaric Nightingale
Aug. 23 (Bloomberg)

The cost of shipping Middle East crude to Asia, the world's busiest market for supertankers, climbed the most in 20 months and may extend its rally as cargo demand strengthens.

September demand is outpacing that of August ``by a long way,'' Tim Coffin, an analyst at London-based Capital Shipbrokers LP, said in an e-mailed note today. Tanker-hire prices are ``firming fast,'' he said, ``we didn't expect it.''

Some cargo loadings may have been delayed from August to September, he said, reducing tanker demand.

Sinochem Corp., China's biggest petrochemicals trader, hired the tanker Iran Nesa at a rate of 72.5 Worldscale points, according to a report from Oslo-based PF Bassoe AS today. That's 16 percent above the London-based Baltic Exchange's benchmark rate of 62.7 points for cargoes to Asia.

The exchange's rate climbed 20 percent yesterday, the biggest one-day gain since Jan. 22 last year.

At 62.7 Worldscale points, owners of double-hulled VLCCs can earn about $33,030 a day on a 38-day round trip from Saudi Arabia to South Korea, based on a formula by R.S. Platou, an Oslo-based shipbroker, and Bloomberg bunker prices. Yesterday, they were making $19,881 a day, based on the same calculations.

Frontline Ltd., the world's biggest VLCC operator, said today it needs $30,000 a day to break even on each of the supertankers.

Too Many Ships

Still, there are too many ships for hire, according to a report from Paris-based shipbroker Barry Rogliano Salles today. There are likely to be about 70 more cargoes loaded in September, based on average monthly demand. By contrast, 100 vessels can reach the Middle East by Sept. 23, the broker said.

Bookings for supertankers sailing from the Middle East to Asia account for 47 percent of global demand for the carriers, according to New York-based McQuilling Brokerage Partners LLP. Shipments to the U.S. and Caribbean, the second-biggest market, account for 14 percent of demand for supertankers.

Freight Rates and Seasonality

From McQuilling Services report - August 15th, 2007:
Freight Rates and Seasonality


click on images for larger view

http://www.mcquilling.com/pdfs.asp?ID=Freight%20Rates
click on link for PDF of full report

IEA July 2007 Report On Tanker Rates

Freight Rates

VLCC rates from the Middle East Gulf drifted below seasonal averages in June, falling most notably on westbound trades. Global volumes of oil at sea are now unseasonably low. The upside potential for rates in the summer, prompted by a decline in Asian refinery maintenance, is diluted by ongoing limits on OPEC exports. Interest in crudes from the Atlantic Basin and Mediterranean pushed rates from these regions slightly higher in June. Ample tonnage eroded clean tanker rates in the Atlantic Basin in June, despite high US gasoline imports.

Tanker trackers report that volumes of oil in transit remain well below seasonal norms, apparently confirming low vessel employment for this time of year. Growing VLCC availability was boosted further in the second half of June by the discharge from several of these two-million barrel vessels which had been storing crude temporarily in the US Gulf. VLCC rates from the Middle East Gulf to US Gulf fell from $20/tonne[$2.73/barrel] at the start of June to around $15/tonne[$2.05/b] in early July.

OPEC cargo reductions continue to undermine any potential for a seasonal rebound in vessel demand as Asian refineries return from maintenance. In line with recent months, Saudi Arabia announced that it will supply 9-10% less crude to refineries in the Far East than contracted volumes in August. VLCC rates from the Middle East Gulf to Japan, now booking for loading in August, are currently around $9/tonne[$1.23/b], down by over $3/tonne from early June. However, eastbound rates have shown signs of rebounding in early July.

Suezmax rates from West Africa to the US Atlantic rose by over $1/tonne, to reach $11.50/tonne[$1.57/b] in the second half of June. Corresponding VLCC rates rose by a similar amount in early July. While these increases coincided with a temporary halt in hostilities from a major rebel group in Nigeria and delays at Nigerian ports, higher Mediterranean chartering was probably more supportive. Black Sea to Med million-barrel rates jumped by $4/tonne in the middle week of June, peaking at almost $12/tonne[$1.64]. There were also reports of improved economics for spot exports of African or FSU grades to the US. Increased interest in Aframax vessels in the Caribbean lent support to late-June rates for the sector and reduced broader vessel availability. Brisk chartering elsewhere contributed to firmness in Aframax rates in the North Sea in June, despite maintenance at production facilities.

Clean product tanker rates fell in June, especially in Western markets. Clean rates for 30,000-tonne trades from Northern Europe to the US Atlantic Coast dropped below $20/tonne[$2.73] at the end of June having started the month near $26/tonne[$3.55]. US gasoline imports remain but increased supply of product tankers in the Atlantic and Mediterranean have had an offsetting effect on spot charter rates. By contrast, limited tanker availability may have bolstered Singapore to Japan clean rates in late June following a quiet month of chartering activity, when refineries increasingly returned to operations.

IEA Oil Market Report July 2007

Asian Aframax Rate Gain May Be Limited

Asian Aframax Rate Gain May Be Limited by Rising Ship Supply
By Katherine Espina
July 26 (Bloomberg)

The rate for shipping oil on tankers that can carry 80,000 metric tons on Asian routes posted the smallest increase in six days and any gain may be limited by the increased availability of ships for hire.

The rate for the Kuwait-to-Singapore route climbed 0.14 percent to Worldscale 132.50 yesterday, according to data from the London-based Baltic Exchange. That puts the cost of shipping a barrel of oil at $1.78, Bloomberg data showed.

``The rates may soften with a lot of vessels out there,'' said Takeshi Ando, a shipbroker at Matsui & Co.'s tanker team said by phone today from Tokyo. ``I don't see a lot of activity from the Koreans.''

Sixteen ships, with a total capacity of 1.61 million tons, will sail to Singapore this month, four of them this week, according to AISLive data on Bloomberg.

Aframax vessels, which can typically carry 600,000 barrels of crude oil, are predominantly deployed on short-haul routes or intra-regional trade.

The cost of moving 80,000 tons of oil to Japan from Indonesia was at Worldscale 140 yesterday, unchanged since July 19, according to data from London-based shipbroker Galbraith's Ltd. That puts the cost of shipping a barrel of oil on the route at $1.64.

The rates of shipping gasoline, diesel and other oil products rose yesterday. The rate of shipping 30,000 tons of oil products to Japan from Singapore gained 0.3 percent to Worldscale 242.50, according to the Baltic Exchange. The cost of moving 55,000 tons of products to Japan from the Middle East climbed 0.6 percent to Worldscale 194.50.

Shipping 75,000 tons of oil product costs 0.7 percent more at Worldscale 142.29 yesterday, based on Baltic Exchange data.

Worldscale points are a percentage of a nominal, or flat, rate for a route. Flat rates, quoted in U.S. dollars a ton, are revised annually by the Worldscale Association in London to reflect changing fuel costs, port tariffs and exchange rates.

Asian Aframax Rates May Extend Decline

Asian Aframax Rates May Extend Decline Before August Bookings
By Katherine Espina
July 16 (Bloomberg)

The rate for shipping fuel on tankers that can carry between 80,000 metric tons and 120,000 tons on Asian routes may extend a decline until refiners and traders increase vessel bookings for August.

The cost of shipping 80,000 tons of crude oil on so-called aframax tankers to Singapore from Kuwait dropped 0.6 percent to Worldscale 135.58 on July 13, according to the London-based Baltic Exchange. It fell for a third week, losing 5.2 percent in the week ended July 13.

``July liftings are nearly finished but we have not seen any August loading cargoes yet,'' said London-based shipbroker Galbraith's Ltd. in its weekly report. ``Until August liftings start actively, the trend looks to remain the same at present.''

Aframax tanker rate has fallen 9 percent on the Kuwait- Singapore route so far this month on shrinking cargo volume. Six ships, with a total capacity of 605,880 tons, are expected to sail to Singapore this week, according to AISLive data on Bloomberg. That compares with five arrivals in the week ended July 15.

The cost of shipping a barrel of oil on an aframax vessel on the Kuwait-to-Singapore route was unchanged for a second day at $1.94 on July 13, according to Bloomberg data.

Aframax vessels, which can typically carry 600,000 barrels of crude oil, are predominantly deployed on short-haul routes or intra-regional trade. The aframax tanker is among the preferred vessels by non-Organization of Petroleum Exporting Countries in recent years as the harbors and canals that these nations use to export their oil are too small to accommodate supertankers.

Indonesia-to-Japan

The aframax tanker rate on the Indonesia-to-Japan route was steady for a fourth day at Worldscale 145 on July 13, according to Bloomberg data. Shipping a barrel of oil on the route costs $1.70, unchanged from July 10.

The cost of shipping gasoline and other so-called clean petroleum products to Asia on medium-to-large range tankers rose on July 13, according to the Baltic Exchange.

The rate of shipping 55,000 tons of oil products to Japan from the Middle East surged 1.9 percent to Worldscale 193.65 on July 13. It rose 8.7 percent in the week ended July 13, the second week of gains, based on data from the Baltic Exchange.

Frontline Downgraded by UBS

Frontline Shares Downgraded by UBS on Outlook for Rental Rates
By Alaric Nightingale
July 13 (Bloomberg)

Shares of Frontline Ltd., the world's largest oil-tanker company by capacity, were downgraded by UBS AG, which said ship-rental rates are poised to fall, cutting the shipping line's ability to pay dividends.

UBS analysts led by Dominic Eldridge in London cut their rating on the stock to ``reduce 2'' from ``neutral 2'' in a note to clients today.

The ``12-month trend'' for tanker-rental rates is ``poor'' because of the supply and demand outlook, the analysts wrote.

Frontline's dividend payout, calculated by UBS at about 11 percent for this year, is ``totally dependent on earnings, which are themselves almost totally dependent upon the level of spot tanker rates,'' they said.

IEA Medium Term Oil Market Report - Tanker Market

IEA Medium Term Oil Market Report (MTOMR) July 2007
Implications for the Tanker Market

A crude trade forecast slightly ahead of crude demand growth (in percentage terms) should theoretically suggest an increase in tanker employment, if the trend also applies to seaborne trade. Reconciling approximate seaborne crude trade volumes with a distance matrix reveals that tanker tonne-mile demand (trade volume multiplied by distance that cargoes are shipped, an indicator of tanker demand) should rise even more steeply, by 3.5%. The principal contributors to increased tonne-mile demand are higher long-haul exports to China and the US from Saudi Arabia and West Africa, outpacing the countering effect from lower long-haul exports from Middle East to OECD Europe and OECD Pacific.

While increasing volumes of long-haul crude will essentially be shipped in two million-barrel (or larger) VLCCs, demand for million-barrel suezmax tankers should be supported by higher exports from FSU and North Africa via the Mediterranean and increased volumes leaving West Africa. Growth in Russian exports to Europe could boost employment of aframaxes, which carry around half a million barrels.

The tanker trade should be well placed to meet these challenges: there are more tankers on order than at any point since the shipbuilding boom of the early 1970s. A current orderbook of around 140 million tonnes carrying capacity compares with just 73 million at the end of 2003. Today’s orderbook implies that tankers to be delivered by the end of 2010 equate to almost 38% of existing fleet supply in cargo-carrying terms.

Orders for mid-range and smaller tankers are notably strong, alongside historically high orders for new VLCCs, Suezmaxes and Aframaxes. Massive demand, rising steel costs (plus safety requirements to use more steel in tanker design) and increased competition for shipyard space from other shipping sectors (amid a surge in orders for non-tanker ship types) have pushed tanker newbuild costs to record highs. This is despite ongoing growth in world shipbuilding capacity. A brand new VLCC constructed in Korea now costs around $133 million compared with an average $68 million in 2003. Shipyards in Korea, Japan and China are full until at least 2010.


click on image for larger view

A brimming orderbook provides the potential to redress the prevailing vessel undersupply, prompted by weak tanker ordering early this decade, which has supported freight rates over the last three years. However, this depends on how many vessels are scrapped.

High vessel earnings have kept scrappings at record lows over the last three years. No VLCC has been scrapped since 2004. While sustained lower freight rates would prompt an upswing in scrapping, a different, clearer threat to vessel supply is the 2010 (IMO) deadline for the phasing-out of all singlehulled tankers. In the VLCC sector, this would translate into a reduction in the current operational fleet by as much as 28%, as vessels are scrapped or converted into dedicated floating storage units, offshore oil production vessels or even dry-bulk carriers. However, certain exceptions may dilute this figure (such as for vessels with double-bottoms or double sides) and some vessels may continue to operate outside IMO signatory waters. Simpson, Spence and Young forecast vessel deletions to correspond to around 3% of the current tanker fleet annually through 2010, with the most pronounced declines in VLCC tonnage. When combined with orderbook data, SSY fleet projections suggest net annual expansions of the tanker fleet of around 6% by end-2010.

Despite potential support from firm trade growth and vessel phase-outs, freight rates in the medium term face genuine downside risk from an expanding fleet. However, perhaps a greater threat to freight rates is the downside risk from oil market fundamentals. Demand dented by an economic downturn or by higher prices following underperforming supply could significantly undermine oil trade and tanker demand.

Here is the report itself (80 pages)http://online.wsj.com/public/resources/documents/iea20070707.pdf

Frontline and Friends on Fire

Frontline and Friends on Fire
by Toby Shute
July 10, 2007 (Motley Fool)

Thursday's spike in Frontline (FRO) shares reminded me that I hadn't looked at any of the crude oil shippers in a while. After a little digging, I turned up a few potential explanations for the pop, one of which can be safely ignored -- and one that can't.

Around the time I reviewed the first-quarter results of Nordic American Tanker (NAT), overcapacity started weakening freight rates for crude carriers. One explanation pegs the capacity glut on slowed import demand from China, which was busily executing refinery turnarounds. This maintenance work's seasonal, routine nature makes me think that spot rates' pre-summer softening shouldn't have surprised anyone. Sure enough, these companies' stocks have shown no significant weakness. Tiny Top Tankers (TOPT), for one, has seen shares surge since mid-May.

Not everyone is celebrating the group's buoyancy. Citigroup analyst John Kartsonas noted in early June "that currently there is limited value in any of the tanker stocks we cover, as valuations have reached unsustainable levels."

If that's the case, why has Frontline, the bellwether of the group, ramped higher in the past week?

Ignore the recently resurfaced buyout rumors involving ExxonMobil. Frontline is Norwegian billionaire John Fredriksen's golden goose, and he's not likely to take a gander at any takeover offer.

Any theoretical buyout premium is a pittance compared to the massive cash flows this world-leading tanker operation consistently pumps out.

Instead, concern yourself with the supply and demand outlook for tankers and crude oil. The two factors are related, but have their own individual dynamics. Tanker oversupply seems to be kept in check right now by both the phasing out of single-hulled units, and the usage of some units to store oil rather than deliver it. With oil futures in contango - i.e., pointing higher in future months -- it becomes economic to sit on the oil for a while.

As far as the crude oil market goes, increases in supply and demand alike are a recipe for higher freight rates. Futures contracts on the benchmark supertanker route are pointing higher -- roughly double their present level, according to Imarex. This outlook seems to be supporting Frontline, Overseas Shipholding Group (OSG), and Tsakos Energy Navigation (TNP), even as they float near 52-week highs.

http://www.fool.com/investing/general/2007/07/10/frontline-and-friends-on-fire.aspx

Weekly Oil Tanker Rates - July 6th, 2007 (update)

weighted average of weekly oil tanker rates
chart, graph, crude oil, oil tanker, oil tankers, tanker rates, freight

click on image for full screen view

Dahlman Rose sees IPOs from 30 shippers by end '08

Dahlman Rose sees IPOs from 30 shippers by end '08
Jun 19, 2007
By Nick Carey

Within the next 18 months the maritime shipping sector could generate up to 30 initial public offerings due to global demand for everything from coal to consumer goods, an industry financier said on Tuesday.

"What's interesting in this sector is that we're seeing rising production combined with rapidly growing demand," said Simon Rose, chief executive of Dahlman Rose, a New York-based boutique investment bank for the energy supply chain sector.

He added that within a year the U.S. markets should see their first IPO from the operator of a fleet of special tankers used to store or move oil from offshore platforms.

Dahlman Rose is currently working on two other offerings that will be announced by the end of June, one in the coal industry, one in offshore drilling. Rose declined to give details.

He said the maritime shipping IPOs over the next 18 months will be primarily focused on the dry bulk sector, with a handful of container shipping companies that haul consumer goods in containers and oil tanker companies.

Dry bulk ships haul bulk commodities like coal, iron ore and agricultural products, with demand driven in part by rapidly growing Asian economies like China and India.

"We've seen a huge growth in iron ore and coal production, and ports are struggling to deal with the extra demand," Rose said. "We expect this situation will continue for some time."

Since Dahlman Rose was founded in 2004 -- Simon Rose is co-founder along with Ernest Dahlman -- the firm has lead managed or co-managed some 20 IPOs or secondary offerings worth around $3.8 billion, primarily in maritime shipping.

At the end of May, the firm opened a new group focused on exploration and production plus oilfield services, which Rose said reflected the global drive for new energy sources.

"We're going to see more deep sea drilling further offshore," Rose said. "Onshore, we're going to see opportunities for companies using different technologies to drill for oil."

Offshore platforms will require Floating Production, Storage and Offloading vessels (FPSOs) -- tankers specially designed to safely take and store oil from these platforms at sea, then transfer them to shuttle tankers to transport to shore.

Rose said there is investor interest in the United States in seeing an FPSO operator -- most operators are currently based in Norway -- either launch an IPO here or dual-list its stock on a U.S. market.

Earlier this month Dahlman Rose arranged the sale of 25.5 million shares of FPSO operator Sea Production, which were owned by Norwegian tanker company Frontline Ltd. , to institutional investors.

The investment bank is also lead manager on the sale of 2.05 million shares in a secondary offering for Tulsa, Oklahoma-based oil and gas exploration company Arena Resources Inc. , which should close Wednesday.

"Arena has done some tremendous work using new technologies in oilfields that were not worth drilling when oil was trading at far lower levels," Rose said.