VLCC Owners See Lowest Returns Since 2008 And It Ain’t Getting Better

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July 24, 2012

(Bloomberg) — A glut of the biggest oil tankers in the Persian Gulf expanded, a Bloomberg survey showed, adding to pressure on owners facing returns near the lowest level in at least four years.

There are 20 percent more very large crude carriers available for hire over the next 30 days than there are likely cargoes, according to a Bloomberg News survey of six shipbrokers and owners today. That’s an increase of 1 percentage point from last week and up 5 points compared with a year earlier, previous survey data show.

VLCCs on the industry’s benchmark Saudi Arabia-to-Japan route are losing $5,284 a day, according to the Baltic Exchange in London. Returns have stayed negative for 14 sessions. Crude demand and export volumes have slowed as buyers delay purchases, according to Samuel Ciszuk, an oil consultant at KBC Energy Economics in Walton-on-Thames, England.

“Coming into the third quarter, overall crude demand is still weaker,” Ciszuk said by phone today. “Consumers will look to maintain crude stocks toward the end of the year.”

Owners must contend with a VLCC fleet poised to expand by 6.8 percent this year, exceeding 4.6 percent demand growth, according to data from Clarkson Research Services Ltd., a unit of the world’s largest shipbroker. The tankers, each able to hold 2 million barrels of crude, were losing $7,243 a day as of yesterday, the worst return for exchange data starting in 2008.

The U.S., the European Union and the United Nations have imposed trade and financial sanctions on Iran in an effort to isolate the second-biggest producer in the Organization of the Petroleum Exporting Countries over its nuclear activities. Stockpiling of crude linked to concern about potential supply disruption lifted rates in 2012’s first half, according to New York-based investment-bank advisory firm Evercore Partners Inc.

Charter rates for VLCCs on the benchmark voyage added 0.7 percent, the most in five weeks, to 33.97 industry-standard Worldscale points, exchange data showed.

The Worldscale system is a method for pricing oil cargoes on thousands of trade routes. Each individual voyage’s flat rate, expressed in dollars a metric ton, is set once a year. Today’s level means hire costs on the benchmark route are 33.97 percent of the nominal Worldscale rate for that voyage.

The exchange’s assessments don’t reflect speed cuts aimed at reducing fuel costs, vessel owners’ largest expense. Owners can boost returns by slowing ships on return journeys after unloading of cargoes. The price of ship fuel, or bunkers, slid 1.7 percent to $615.08 a ton, the figures showed.

The Baltic Dirty Tanker Index, a gauge of costs to transport crude that includes vessels smaller than VLCCs, gained 0.5 percent to 630, according to the exchange. That was the fourth straight increase.

By Rob Sheridan. Copyright 2012 Bloomberg

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