Freight rates to Asia soar with high demand

Freight rates to Asia soar with high demand

LONDON (Reuters): The market is booming for very large crude carriers (VLCC) with freight rates to Asia hitting their highest point since the 1991 Gulf War.

The price of transporting crude oil from the Middle East to Japan has reached almost $12 a ton, nearly double the rate a year ago, on surging Asian demand and a shortage of modern, environmentally sound ships, brokers and analysts said.

Freight rates have been forced up due to an unusually large amount of oil in transit -- almost 460 million barrels, a level rarely seen since the early 1990s and up 30 million barrels since last year, according to Oil Movements, a British weekly newsletter.

"Volume has been building at around 0.4 million barrels per day since mid-year, and is probably not too far away from stretching the capacity of the transport system," the newsletter said in its latest issue.

Oil Movements publisher Roy Mason said that although the Japanese economy was sluggish, booming demand in countries such as South Korea, Thailand and Taiwan more than made up for this.

"Japan is important but it is the others that are generating the good rates," he added.

The booming U.S. economy was also pushing up long-haul oil demand, Mason said.

"Long-haul oil trade is up partly because the short-haul surge in output has been much slower than the industry had been counting on.

"Long-haul has substituted for short-haul," Mason said.

Tanker analysts also said the surge in VLCC rates over the last three weeks was also a legacy of the 1970s boom in shipbuilding, with many of these now elderly vessels still active even though they are increasingly unwelcome in Japan and South Korea in particular.

The Japanese and South Korean authorities are deeply concerned about oil spills and the environmental devastation they can cause, and South Korea has in the last year or two followed Japan's example by insisting that ships that call there are modern and safe.

"South Korea has had a big impact in the last year and a half. They have been demanding almost exclusively modern tonnage and that has added a lot (to demand for such ships)," a U.S. tanker broker said.

Demand for crude has also been pushed up by a boom in refinery building in Asia in recent years. South Korean refinery capacity rose 11 percent last year from 1995 and is now the biggest refining center in Asia after Japan.

Freight rates have also been boosted by seasonal factors as both North America and Japan and South Korea stock up ahead of the winter, analysts said.

VLCC rates from the Middle East to Japan on Wednesday hit Worldscale 100 for the first time since the Gulf War and for only the second time since the 1973 oil crisis, they added.

Worldscale rates express tanker freight rates as a percentage of a set level, which in the case of Middle East/Japan voyages is $11.93 per ton.

Brokers said orders for new ships were high, and in the longer term this could push rates down as more modern vessels came onto the market.

But several brokers felt that the market was likely to maintain its strength for now, after three VLCCs had been fixed at Worldscale 100 to Japan.

"The strength could stay for a couple of months. People are optimistic that at least rates will not go down for now," one broker said