Crude Tanker Rates to Rise on OPEC Decision (FRO, SFL, NAT, OSG, TNK, TNP)

Last week’s decision by OPEC to continue to produce crude oil at the cartel’s official quota level of 30 million barrels/day had the knock-on effect of emboldening tanker operators to raise shipping rates for the very-large crude carriers (VLCCs) that haul 2 million barrels of crude. Third-quarter rates will average $18,000/day, according to a report at Bloomberg News, up from a low of about $9,700/day in the second quarter.

Tanker companies included Frontline Ltd. (NYSE: FRO), Ship Finance International Ltd. (NYSE: SFL), Nordic American Tankers Ltd. (NYSE: NAT), Overseas Shipholding Group Inc. (NYSE: OSG), Teekay Tankers Ltd. (NYSE: TNK), and Tsakos Energy Navigation Ltd. (NYSE: TNP) are all expected to benefit as demand for VLCCs to carry all that Middle East production to Asia is expected to outstrip the availability of the vessels.

There is even better news for shippers. The drop in crude prices has not been followed by a similar drop in prices for refined products. That means that more crude will be refined and sent by ship to buyers. More demand equal higher prices for refined products cargoes.

More demand for tankers as floating storage may also emerge if prices for crude continue to be depressed. Filling a VLCC and driving it in circles can be profitable in a market where futures prices are higher than current spot prices, as they currently are.

In the past 12 months, share prices for tanker companies have fallen anywhere from around -13% at Ship Finance to -72% at Frontline. Since January, all except Overseas have moved to share price gains, led by Ship Finance with a jump of 63%, followed by Teekay Tankers, up 24%, and Nordic American up 12%. Even Frontline has managed to return to positive territory, up more than 5% since the beginning of the year.

To appreciate how far the market for VLCCs has fallen, it’s worth remembering that in 2007, the day rate for one of these brutes was $227,000. The market has a long way to go before those rates return.

Paul Ausick