Frontline Ltd., the world’s biggest supertanker operator, may return to profit this quarter after its biggest loss since 2002 as oil demand from China curbs a glut of vessels that sent freight costs to a 13-month low.
Daily returns on the benchmark Middle East-to-Asia route rose sixfold to $42,726 in a month as oil buyers booked the most vessels since at least 2005, according to data from the Baltic Exchange and Galbraith’s Ltd., a shipbroker in London. Traders of forward freight agreements, used to speculate or hedge, were anticipating rates of $17,285 as recently as three weeks ago.
The derivatives still aren’t pricing in a sustained rally, with fourth-quarter contracts at $25,096, below the $31,300 Frontline needs to break even. Rates had been unprofitable since November as vessels from the biggest building program in history left yards. This month’s gains suggest the glut isn’t as large as some analysts estimate, said Doug Mavrinac of Jefferies & Co. in Houston, who correctly predicted a rally in 2009 and expects second-half rates to average $50,000, 17 percent more than now.
"There’s a clear increase in oil being shipped from both the Middle East and West Africa and a lot of that is heading for China,” said Jens Martin Jensen, the Singapore-based chief executive officer of Frontline’s management unit. “The way the market jumped is a clear sign to me that there’s no weakening of Chinese demand.”
The Hamilton, Bermuda-based shipping line, chaired by billionaire John Fredriksen, will report today a fourth-quarter loss of 13.4 cents a share, the worst for any quarter since 2002, according to the mean of 10 analyst estimates compiled by Bloomberg. The rebound in rates means Frontline is already profitable again and will make 20.8 cents a share in the three months ending March 31, the mean of six estimates shows.
Benchmark Route
Tankers on the benchmark route earned owners as little as $1,661 in October, the least in 13 months, according to data from the London-based Baltic Exchange, which publishes assessments for more than 50 maritime routes. After charterers booked 113 ships so far in February, the most for the month since at least 2005, returns for owners are now close to their highest since June.
A majority of equity analysts remain pessimistic or neutral, with just six out of 25 rating Frontline a “buy.” Shares of the company fell 3.2 percent in Oslo trading this year, compared with a 1.9 percent advance in the six-member Bloomberg Tanker Index, in which it has the second-highest weighting, behind Vancouver-based Teekay Corp.
Tanker owners are still doing better than those operating dry bulk carriers hauling coal and iron ore. Rates for capesizes slumped 86 percent in the last four months, according to Baltic Exchange data.
Combined Output
Demand for tankers is growing as the Organization of Petroleum Exporting Countries, supplier of about 40 percent of the world’s oil, pumps more crude. The group’s combined output rose 0.7 percent to 29.4 million barrels a day in January, according to Bloomberg estimates. Production rose for a second consecutive month, the first time that’s happened since May.
"Rates have bottomed,” said Robert Mackenzie of FBR Capital Markets in Arlington, Virginia. “The first and most important thing is OPEC announced that January production was up to almost 30 million barrels a day,” said the analyst, whose stock recommendations earned investors a 53 percent return in the past two years, according to data compiled by Bloomberg.
OPEC’s policy is to increase supply in line with demand, Saudi Arabian Oil Minister Ali al-Naimi said in a speech in Riyadh on Jan. 24. His counterpart from the United Arab Emirates, Mohamed al-Hamli, said Feb. 14 that while the market is “well supplied” for now, the group is ready to increase production to curb any increase in prices that may hurt demand.
Production Quotas
West Texas Intermediate traded on the New York Mercantile Exchange rose 34 percent since May to $91.42 a barrel while Brent crude has traded above $100 on the ICE Futures Europe exchange in London for about three weeks.
OPEC’s compliance with record supply cuts dropped to a two- year low in January, the Paris-based International Energy Agency said Feb. 10. Iraq is the only one of the 12 members not subject to quotas.
The group’s spare production capacity may be shrinking, Goldman Sachs Group Inc. said in a report Jan. 24. New York- traded crude will be at $105.50 in 12 months, or 15 percent more than now, the bank estimated. Futures markets anticipate a price of $100.55 a year from now, data from the Nymex show.
Oil demand will expand 1.6 percent to a record 89.1 million barrels a day this year, the IEA estimated Jan. 18. China, the world’s biggest energy consumer and second-largest user of oil, imported 21.8 million metric tons of crude in January, the third-highest monthly volume since at least 1999, according to customs data.
Chinese Economy
China’s economy will expand 9.25 percent this quarter, accelerating to 9.55 percent in the next two quarters, according to the median estimate of as many as eight economists surveyed by Bloomberg. That’s more than twice the speed of the U.S., the world’s largest oil consumer, the estimates show.
The 113 Middle East bookings made in the spot, or single voyage, market this month are equal to about 226 million barrels of oil, based on each supertanker holding about 2 million barrels. That’s enough crude to supply the U.S. for about 12 days, according to data compiled by BP Plc.
Oil producers and refineries also ship cargoes on long-term contracts that aren’t reflected in spot markets.
The surplus of supertankers competing for cargoes of Middle East oil dropped to 7 percent, less than half of last year’s average of 15 percent, according to a survey of eight shipbrokers and owners on Feb. 15. The survey measures how many more vessels there are available for hire over the next 30 days relative to the number of likely cargoes.
"It’s astounding to see rates rising as they have,” said Nigel Prentis, the analyst at HSBC Shipping Services Ltd. in London who correctly predicted a slump in rates for ships hauling coal last month. “It just shows that vessel supply is tighter than we think.”
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