Frontline Ltd (FRO)

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DJ OPEC Oil Deal Sinks Tanker Industry -- Heard on the Street


12:07 PM Eastern Daylight Time May 30, 2017
By Spencer Jakab
Last week's agreement by major oil exporters might or might not hit its target, but it will almost certainly cause collateral damage to an already-reeling industry: oil tankers.

The companies that transport crude around the world's oceans are fairly agnostic about the price of crude and even the amount in currently brimming storage facilities around the world. But when producers such as Saudi Arabia, Kuwait and the United Arab Emirates curtail output, it hurts their bottom lines at what may be the worst possible time.

Consider that, of the 96 million barrels of crude that are consumed each day globally, only about a third ever gets on an oceangoing tanker. But Persian Gulf crude exports are nearly all moved that way.

A good way to quantify demand for tankers is ton mile demand -- multiplying nautical miles traveled by deadweight tonnage of vessels. In April, the ton mile demand from the Persian Gulf fell by nearly 11% compared with a year earlier, according to William Bennett, lead analyst for trade at VesselsValue. The world-wide drop was just 8%, mitigated by more demand for the very long journeys from West Africa and the U.S. Gulf to Asia to replace Arabian light crude varieties now in short supply.

The lag between ordering a ship and delivery means that many brand new vessels are coming onto the market when they aren't needed. When the oil market was booming from 2013 to 2015, just 109 of the two biggest sizes of tankers were delivered. Tanker company Frontline Ltd. estimates that the number will swell to 274 between 2016 and 2018.

The upshot is that rates are under pressure, squeezing owners such as Frontline, Euronav, DHT Holdings, Teekay Tankers and Gener8. The greatest pressure on their cash flows should be felt during this year's second and third quarters.

"We do expect rates to be pretty challenging," said Christian Waldegrave, research manager at Teekay Corp. in a video presentation about industry conditions.

Frontline reported first-quarter earnings Tuesday that were down by two-thirds from a year earlier. Second-quarter earnings estimates for every major U.S.-listed oil shipper are down sharply, according to FactSet.

The industry is banking on a turnaround in 2019 as new orders fall and older ships get scrapped. But desperate ship builders and opportunistic buyers have seen some new orders recently. It really is true: Hope floats.