Oil tanker rates may stay firm but Asia is key
Oil tanker rates may stay firm but Asia is key
LONDON (Reuters): The cost of shipping oil around the globe is expected to stay firm in 1998 but much depends on demand from Asia which has been hit by financial crises, especially South Korea, analysts say.
Freight rates for Very Large Crude Carriers (VLCC) from the Middle East to Japan this year hit their highest level since the Gulf War in 1991.
They pierced the psychologically important Worldscale 100 barrier in October and stayed at or above that level for three weeks. W100 is equivalent to about $12 per ton.
VLCC rates have since plummeted to about W60, or 60 percent of the October rate, but analysts said they did not rule out a return to this autumn's levels in 1998 so long as Asia's financial woes did not intensify.
Mark Jenkins, senior analyst at brokers Simpson, Spence & Young (SSY) in London, said, "Overall, a good 1997 looks set to be followed by a good 1998. A lot of the new tanker fleet is not set to be delivered until 1999 onwards."
"But a lot of it boils down to what happens in the East. The Koreans will want to keep their refineries going, even if a slump at home hits the home market.
"They will need to keep up their (refined oil product) exports and to generate dollars to keep afloat."
South Korea is the largest oil refiner in Asia after Japan, with a capacity of about 1.8 million barrels per day (bpd).
But its petrochemical sector has been hit by a national financial crisis that has caused the won currency to plummet and necessitated a rescue package worth almost $60 billion engineered by the International Monetary Fund (IMF). The IMF has also had to extend large loans to Thailand and Indonesia.
Analysts agree that if the South Korean crisis intensifies or spreads it could have disastrous consequences for Asian oil demand and for tanker freight rates.
According to a Reuters survey of oil analysts, Asian oil demand will be lower by 340,000 bpd than previous estimates next year because of the currency crisis. They pegged demand to average 20.26 million bpd, having previously forecast it at 20.61 million.
Brokers Galbraith's Ltd said it had been suggested that as a result of the IMF austerity package, South Korean crude imports could fall by about 10 percent, which would result in 33 fewer VLCC cargoes arriving there in 1998 than 1997.
They also said eight new vessels would enter the South Korean fleet next year, and that while in the past an older vessel was scrapped for each new ship delivered, "they have now run out of older ships to scrap, so next year's newbuildings will represent an expansion in South Korea's fleet, rather than a renewal."
"With these two factors combined, there could be a reduction of 71 spot market fixtures to Korea, from about 240 in 1997 to about 170 next year.
"The better fortunes of 1997 for VLCC owners, partially driven by the Korean market, look set for the double blow of declining import requirement and more of that requirement being carried by Korean tonnage," Galbraith's said.
SSY's Jenkins was more optimistic about the broader outlook, saying there were now 61 VLCCs on order worldwide against 24 a year ago, but most of these would not enter the fleet in 1998 and this was not therefore a bearish factor.
But he added: "The sheer number of ships on order to be delivered beyond 1998 means that serious questions have to be asked as to whether the market will remain firm after next year."
SSY said in its latest monthly report that South Korean imports of West African crudes had risen to 200,000 bpd in the first nine months of 1997 from 130,000 bpd in the same period last year, and that Asian demand for West African oil was likely to grow further next year.
"Any growth of crude exports from the Middle East to western markets in 1998 would also mean that, as has already been seen in 1997, there would be a ready supply of VLCCs ready to back-haul cargoes from West Africa to destinations east of Suez.
"If this scenario ensues, ton-mile employment in the large tanker sector would undergo further growth, thereby helping to sustain the high earnings that these sizes have commanded in 1997," the report said.
Erik Ranheim of Intertanko, the Oslo-based body which represents 80 percent of the world's independent tanker owners, agreed that vessel supply looked "fairly steady" next year.
But he was concerned about Asian oil demand. "Eastern countries have been the locomotive of demand growth, but the locomotive may not be pulling too hard next year," said Ranheim, head of Intertanko's market research and statistics department.
Roy Mason, editor of Oil Movements, a weekly British-based newsletter, said: "The VLCC market is fundamentally tight. That means it is highly reactive.
"Rates as this year will behave highly cyclically. Depending on short-term pressure, they will go up and down."
He said it was "quite likely that rates will reach W100 at some point.
"The tightness means it could be triggered quite quickly, if only briefly."
Mason said he did not expect Asia's economic problems to have a severely bearish effect on tanker rates so long as there was not a financial collapse.
Refined product tanker brokers said there was little hope that this sector would revive from its recent doldrums.
"This year has been pretty weak and I can't see some magic wand that will turn that around," said a senior clean tanker broker.
"The only hope is that older ships which are not making money will be scrapped. It can be very expensive for some of these ships to get oil company approvals.
"But whether they will get the razor blade depends if there is demand for scrap metal. If the price of scrap goes down, if the economies of the East no longer have the same need for scrap, then it won't be worth scrapping these ships, and you have a very big vicious circle," added the broker, who asked not to be identified.