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Morgan Stanley and Evercore Say $100k Tanker Rates Possible

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January 15, 2015

al kout vlcc kotc kuwait oil tanker company
“Al Kout”,Image courtesy DSME
By Naomi Christie and Angelina Rascouet

(Bloomberg) — Supertanker owners from Tokyo to Athens said demand to store oil on vessels is strengthening, with Morgan Stanley and Evercore Partners Inc. predicting the highest shipping rates in six-years are possible.

Frontline Ltd., Nippon Yusen Kaisha and Dynacom Tankers Management Ltd., who control 11 percent of the fleet, said orders are multiplying as the global oil glut expands.

Brent crude plunged 60 percent since June amid signs OPEC nations are unwilling to tackle a global oversupply they say was caused by U.S. drillers and other producers. The price of oil for delivery at later dates is so far above current costs, a market structure known as contango, that it can be profitable to store cargoes and lock in returns now in the futures market.

“This is going to tighten the market and make the entire market move higher,” Fotis Giannakoulis, an analyst at Morgan Stanley in New York, said by phone Jan. 12. “If contango keeps deepening it wouldn’t be a surprise” for the biggest tankers to earn more than $100,000 a day, he said.

Tankers shipping Middle East oil to Japan, a benchmark route, earned $83,853 a day yesterday, according to prices from the Baltic Exchange in London. The rate last exceeded $100,000 a day on July 30, 2008, its data show. An increase to that level may only be temporary because the contango “cannot” stay high enough to drive up storage for “too long”, Giannakoulis said.

Six Months

Brent for February settlement slid 45 cents, or 0.9 percent, to $48.24 a barrel on the London-based ICE Futures Europe exchange at 11:49 a.m. Singapore time. The contract expires today. The more-active March future was 39 cents lower at $49.47.

As much as 58 million barrels of tanker capacity has been booked in the past several weeks with storage options, estimates Galbraiths Ltd., a London-based shipbroker.

“If more and more ships are used for storage and taken out of the trading fleet then yes, I think that’s the type of event that would need to take place for it to get to $100,000 a day,” Jonathan Chappell, a shipping analyst in New York for Evercore, said by phone yesterday. “With something like floating storage, which is somewhat of an anomalous trade, then it’s certainly possible.”

The demand is typically to store for at least six months, according to all three tanker companies. Dynacom is based in Glyfada, near Athens, Frontline in Hamilton, Bermuda, while Nippon Yusen is in Tokyo.

Brent crude for February settlement was about $7 cheaper than for August on the ICE Futures Europe exchange at 6 p.m. in London yesterday. A gap of about $6.50 is enough to cover hiring a ship and other costs associated with the trade, according to E.A. Gibson Shipbrokers Ltd. in London.

Total Capacity

The crude tanker fleet can store about 215 million barrels, or 10 percent of its total capacity, Giannakoulis said. The estimate includes ships smaller than very large crude carriers, the biggest vessels. About 5.5 percent of the VLCC fleet was used for floating storage in 2009, the last time the trade took place, he said.

Morgan Stanley raised its average 2015 rate forecast for VLCCs to $45,000 a day on Jan. 12, up $10,000 from the previous estimate, citing potential demand for floating storage. For the rate to rise as high as $100,000 a day would require “a very steep contango,” Giannakoulis said.

“Clearly that’s going to make the spot market tighter and feed to higher rates,” Eirik Haavaldsen, an analyst at Pareto Securities AS in Oslo, said by phone yesterday.

–With assistance from Kiyotaka Matsuda in Tokyo.

(c) 2015 Bloomberg.

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