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.