Non-OPEC output a non-issue for OPEC's future market dominance

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Jan. 16 -- Tanker freight rates continue to be driven by supply and demand fundamentals, reported McQuilling Services LLC.

According to the weekly report, dated Jan. 14, it would appear that the supply picture will have a negative effect on the freight market in 2009, which may generate weaker spot rates than in 2008.

Given that dirty tanker demand was 0.7% lower in 2008 than in 2007, the answer behind healthy freight rates during the past year may be found in the supply picture.

The report said that short-term supply effects, such as delays, slow steaming, and floating storage, were present in 2008 and the overall additions and exits picture looked rather balanced as well.

The 2009 supply picture, however, looks very different and McQuilling compared the 2 years in order to obtain a better understanding of the possible supply impact on the freight rates going forward.

Given the strength of the dry bulk market in 2007 and the first half of 2008, a significant amount of older tanker tonnage exited the fleet in 2008 for conversion into dry bulk vessels.

According to the report, that was a major, nontraditional element of the supply picture in 2008 that had a substantial impact on vessel exits from the fleet.

In parallel, the scrap price recorded historical highs and a significant amount of tonnage was demolished, McQuilling said, adding that exits for offshore conversions also took place and permanently removed a number of vessels from the marketplace.

Lastly, single to double-hull conversion projects also removed tonnage from the trading fleet and further contributed to the relatively balanced supply picture in 2008.

"A negative net fleet change observed in the [very large crude carrier] and Suezmax sectors in 2008 translates into positive effect on freight rates," the report said.

McQuilling also noted that a positive net fleet change observed in the smaller tanker sectors was constantly challenged by short term supply disruptions observed throughout the entire year.

The overall result was an occasional shrinkage of tanker supply which had a positive impact on freight rates providing healthy spot and period market earnings.

This coming year, however, may draw quite a different picture, according to the report, which assumes that there will be no exits for dry bulk conversions in 2009 due to the struggling dry bulk markets.

The old tonnage or "cash cows" will not rush to the scrap yards with presently low scrap prices, as long as the tanker markets remain relatively healthy and charterers don't ban the single hull vessels before their phase-out dates.

Some conversions to double hull also may take place in the smaller tanker sectors but McQuilling expects them to be nominal due to the present-time unattractive economics of such projects.

Finally, the analyst expects the offshore conversions to take place at a moderate rate.

The resulting 2009 tanker supply picture looks rather opposite of the 2008 one. While in 2008 there was a net fleet increase of 109 vessels across five tanker sectors, the 2009 increase may be 362 vessels or 332% higher.

"It seems that the last variable with any wiggle room is bunker prices, which will have to average significantly lower in 2009 to generate TCE revenues anywhere near last year's levels," the report concludes.

Contact Eric Watkins at hippalus@yahoo.com.

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