Oil output cuts likely to hit crude carriers

Oil prices remained on the bearish side despite news that Opec has decided to cut production by 1.2 million barrels a day.

But prices are set to remain below $60 for the time being as the perception in the market is that much of the production cut has already taken place. The decision therefore just legitimises some of which has already occurred.

Such cuts will be bad news for owners of large crude carriers, particularly as Saudi Arabia and Nigeria already implemented a reduction in November supplies to some customers.

Tanker rates felt further pressure last week as tonnage availability continued to outpace demand in most key markets. In Asian trades, the news of record Chinese crude imports in September of 3.2 million barrels a day did not add impetus to the market.

The picture is turning into a battle of wills between VLCC owners, with some giving in to charterers' lower rate demands, but others holding out for a rebound. Rates for the major 260,000-tonne eastbound VLCC route, Arabian Gulf to Japan, were trading at about Worldscale 70 for double-hulled tankers and WS62.5 for singles. The Hebei Spirit was fixed for WS70 to Taiwan.

Aframax

There has been little enquiry in Asian Aframax trades, meanwhile, with a particular lack of fuel oil cargoes in evidence, as regional stocks are reported to be buoyant. Exxon took the Feng Huang Zhou from Yanbu to the East at WS175. Rates for 80,000 tonnes Indonesia-Japan were trading at WS160 for single-hulled tonnage and WS175 for doubles by the end of last week. For Asian clean markets rates fell sharply again last week to WS200 for 30,000-tonne cargoes trading from the Singapore area to the East.

With bunker prices much lower now than they were in April, the Worldscale level to which owners can drop their rates and still profit on earnings could prove lower than was the case six months ago.

Vietnamese traders might decide not to take the country's expected import volume of high-sulphur diesel in the fourth quarter; the reason is uncertain domestic demand. This is indicative of the trend in much of Southeast Asia, where high oil prices have dampened demand growth through much of this year. Weak trans-Pacific arbitrage has also helped put downside pressure on freight rates over recent weeks. Also, Singapore's air is again deteriorating. A thick layer of smoke from Indonesian forest fires has spread to the Malaysian peninsula.

Local agents say that there has been no official shipping slowdown, but operators have been advised to be more vigilant. In Western markets, news was also on the bearish side for crude tanker owners, with a rise in US crude stocks reported plus a reduction in the 2006 estimate for North American demand by the International Energy Agency.

In its latest monthly report, the IEA revised its US demand figure slightly lower for 2006 because of a slump in fuel oil demand and other products, even as transport fuel consumption remained firm. Weekly US storage data indicated a rise in crude stocks, which are well above their normal levels for this time of year. Rates for VLCC trades from West Africa followed a slight upward pattern: The trend opposite to Arabian Gulf cargoes. Rates for the trans-Atlantic WAFR trades into the Gulf of Mexico traded from WS90 to WS100 for 260,000-tonne cargoes, with demand coming from US refiners returning from maintenance this month.

Suezmax

Suezmax trades also felt pressure last week, with lower levels recorded in West Africa, where rates fell to WS130, and the Med-iterranean, which dropped to WS125. By contrast, there was firm demand for Aframax tonnage in Europe - particularly in North Sea trades, where rates rose 50 points to WS190 over the week. Despite a rise in Atlantic basin stocks to what Petro-leum Argus described as "their highest levels since May 1999", there was some buoyancy in trans-Atlantic clean tanker markets last week. Product prices remain in 'contango', with the higher forward prices encouraging stock building for the time being. Rates proved firmer than in the first week of October. Rates for 37,000 tonnes from the UK/Continent to the US Atlantic Coast rose 15 points to WS235 by Friday. While US petrol stocks rose last week, there was a fall in distillate inventories, which could prompt more import interest over the short term.

The writer is a shipbroker and marine consultant with more than 40 years experience in the tanker and dry cargo markets.