Tanker Glut Worsening as OPEC Makes Huge Cut in Oil Production

An unladen Iranian tanker

(Bloomberg) — OPEC’s deepest output cut since the global recession in 2008 is creating the biggest surplus of oil tankers in the Persian Gulf in at least three years and lowering earnings for Frontline Ltd. and other ship owners.

The Organization of Petroleum Exporting Countries reduced daily supply by almost 1 million barrels in the four months through December, equal to one fully loaded supertanker every two days, data compiled by Bloomberg show. Saudi Arabia, Iran and Iraq led the retreat, leaving 24 percent more ships than cargoes in the world’s largest oil-producing region, the most for the time of year since at least 2010, according to weekly surveys of shipbrokers and owners by Bloomberg.

The group supplies 40 percent of the world’s oil. It had raised supply by 4.8 million barrels a day since the first quarter of 2009, diminishing a surplus of ships and lifting rates above what owners need to break even. Output is now falling as the U.S. meets the highest proportion of its own needs in two decades. Tanker earnings slid 62 percent since November and shares of Frontline will drop 13 percent in a year, the average of 14 analyst estimates shows.

“This cut in OPEC production highlights the slump in tanker demand and absolutely caps potential growth in earnings for owners,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 18 percent in a year. “Owners usually count on a busy start to the year, so 2013 is already shaping up to be challenging.”

Crude Carriers

Daily rates for very large crude carriers dropped 53 percent to $14,090 this year, according to Clarkson Plc, the world’s biggest shipbroker. Earnings will average $19,500 in 2013, according to the median of 10 analyst estimates. They were forecasting $25,000 in October. Frontline, founded by billionaire John Fredriksen, says it needs $23,400 to break even across its fleet of 33 VLCCs.

The Hamilton, Bermuda-based company will report a net loss of $103 million for this year, widening from $87.4 million for 2012, according to the mean of 13 estimates. The analysts were predicting a 2013 loss of $67.2 million three months ago, data compiled by Bloomberg show. Shares of Frontline fell 35 percent to 19.3 kroner in the past year and will drop to 16.88 kroner in 12 months, according to the forecasts.

Shipbuilding Surge

The number of surplus tankers in the Persian Gulf climbed 9 percentage points since the start of the year and is the highest since September, according to Bloomberg’s weekly surveys of shipbrokers and owners. The number of available cargoes hasn’t exceeded shipping capacity since November 2010. The surplus is a consequence of a surge in shipbuilding that began in 2007 and 2008, when rates rose as high as $229,000, Clarkson data show.

Strengthening demand in other regions may help ease the glut of tankers once more. China, the biggest destination for laden VLCCs, imported 8 percent more crude in December, customs data show. The nation ended seven straight quarters of slowing economic growth in the final three months of 2012 and will keep accelerating through at least the end of September, according to the mean of estimates from 32 economists compiled by Bloomberg.

Global oil demand will advance 0.9 percent to a record 90.5 million barrels a day in 2013, the Paris-based International Energy Agency estimates. World trade will increase 3.8 percent this year, up from 2.8 percent in 2012, according to the International Monetary Fund, located in Washington.

Record Scrapping

Fleet growth is slowing, with outstanding orders at ship yards equal to 6.8 percent of existing capacity, from 13 percent a year ago and 47 percent in 2008, according to IHS Inc., an Englewood, Colorado-based research company. Owners will scrap VLCCs with capacity of 2.6 million deadweight tons in 2013, about the same as last year, Clarkson estimates.

The excess supply extends across most of the shipping industry after owners ordered too many vessels when rates surged before the global recession, the worst since World War II. The Baltic Dry Index, a measure of the cost of hauling coal and iron ore, plunged 60 percent last year and the Baltic Dirty Tanker Index, reflecting oil-shipping rates, retreated 18 percent.

VLCCs were earning 50 percent more a year ago because of a surge in demand from countries seeking to stockpile crude as the 27-nation European Union prepared to impose sanctions on Iran over its nuclear program. Rates rose as high as $51,413 in April, and the oversupply of tankers in the Persian Gulf fell as low as 4.5 percent.

Saudi Arabia

Saudi Arabia, the largest crude exporter, boosted output to a record 9.9 million barrels a day in May to compensate for slumping Iranian shipments. Brent crude, Europe’s benchmark, had closed as high as $126.22 a barrel in March, 44 percent more than the five-year average. Prices fell as low as $104.76 by November and Saudi Arabia’s production was pared back to the lowest level in more than a year the following month.

The decline is compounding weaker demand from the U.S., the largest importer, where domestic oil output is the highest since 1993 and natural-gas production the most ever, Energy Department data show. Imports averaged 8.65 million barrels a day last year, the smallest since 1999.

Mitsui O.S.K. Lines Ltd. is the largest owner of VLCCs, with 38, according to Clarkson. The Tokyo-based company, which also operates ships carrying liquefied natural gas and dry-bulk commodities, will lose $261.5 million in its fiscal year ending in March, the mean of 13 analyst estimates shows.

Frontline, once the biggest VLCC operator, split in two in December 2011 to avoid running out of cash amid the lowest rates since 1999. The new Frontline 2012 Ltd. is investing in ships carrying oil, liquefied petroleum gas and iron ore.

“A cut in OPEC production normally spells fewer cargoes and lower tanker earnings,” said Dag Kilen, an analyst at Fearnley Consultants A/S, part of Norway’s second-largest shipbroker. “Fewer cargoes with the market already oversupplied with tankers will push rates down.”

– Rob Sheridan and Isaac Arnsdorf, Copyright 2013 Bloomberg.