Frontline Charters Crude Carriers to Oil Traders – World Still Awash in Oil

• The Company: Frontline, the world’s biggest crude oil tanker fleet operator.
• The Filing: FORM 6-K filed with the SEC on December 03, 2008.
• The Finding: Crude oil transporter Frontline Ltd. said oil traders have chartered 25 vessels and may take as many as 10 more in order to store crude for future sales at sea, according to Bloomberg Press. The news suggests that average world oil production is still exceeding demand, which will likely lead to softer spot charter rates over the next twelve months.

The Upshot: During the quarter-ended September 30, the company’s very large crude carriers (VLCCs), Suezmax tankers and Suezmax OBO carriers earned average daily time charter equivalents (TCEs) of $74,700, $62,700 and $44,100, respectively in the spot market. This compares with average income on TCEs basis of $86,300, $72,000 and $44,100, respectively, in the second quarter. The decrease in tanker rates tanker freight rates was primarily due to lower volumes of oil production from ton-mile intensive OPEC producers and lower crude oil import volumes into the United States, China and India.

During the fourth quarter of 2008, I expect rates for VLCCs to weaken further as OPEC producers implemented additional production cutbacks in response to declining oil prices.

Frontline is highly dependent on the spot charter market, with secured charter coverage of 36 percent and 20 percent of its expected fleet of 84 vessels in 2009 and 79 vessels in 2010, respectively. The average net TC rate for the total fleet is about $43,800 per day in 2009, and $46,200 per day in 2010.

At September 30, the global VLCC fleet totaled 490 vessels, with a total order book of an additional 241 vessels — representing about 49 percent of existing inventory! The Suezmax fleet totaled 346 vessels at the end of the quarter, with an additional 174 new builds on order in shipyards.

Global oil consumption is projected to fall by 800,000 barrels per day, while the price of crude is expected to average $43 a barrel this year, according to the EIA.

The Question: Will storing oil in tankers lift rental rates in the second-half 2009 and 2010?