Why Is Crude Oil Sales Down?

For John, BLUF:  Is it too many oil tankers or too little crude oil being demanded?  Nothing to see here; just move along.

Over at Zero-Hedge we have an article, "Oil Tanker Market In "State Of Panic" As Charter Rates Plunge, Cargoes Rejected", submitted by Tyler Durden.♠  It was submitted on 2 April 2013 at 19:02.

The point of the article, which I would not normally reproduce in full, is that there are "tells" out there which suggest that there are economic problems out there.

QUOTE
While everyone knows about the epic oversupply of dry bulk containerships as a result of the pre-bubble surge in charter rates (and subsequent collapse), which sent many shipping companies to an early bankruptcy or outright liquidation and also resulted in very depressed shipping rates for the last several years as the supply overhang continues to be cleared out of the system (coupled with still depressed end-demand for "dry" commodities), few may be aware that in the past several months the same fate has befallen the oil-tanker industry.  As Bloomberg reports, John Fredriksen's oil-tanker behemoth Frontline Ltd., said it’s rejecting some cargoes after a rout in rates for the vessels.  "Frontline is offering tankers for charters “selectively” and the market is in a “state of panic” as excess ship supply drives down charter costs, Jens Martin Jensen, chief executive officer of the Hamilton, Bermuda-based company’s management unit, said by phone today."

The reason for the charter rate crunch: plunging rates.  "Crude rates remain in the doldrums,” RS Platou Markets AS, an Oslo-based investment bank, said by e-mail today.  VLCCs earned $17,000 a day on average in the first quarter, down 32 percent from a year earlier, it said.  Fredriksen split Frontline Ltd. in two in December 2011, forming Frontline 2012 to withstand a slump in returns that put the original company at risk of running out of cash.  Frontline Ltd.’s shares fell to the lowest since May 1999 last month and slumped 95 percent since the end of 2007.

It has gotten so bad that VLCCs have been losing $29 a day on the benchmark Saudi Arabia- to-Japan voyage as of March 28, according to the most recent data from the Baltic Exchange in London.  Frontline said in February the ships in its fleet need a daily return of $24,200 to break even.

The collapse in charter rates can be seen below:

Naturally, corporate income statements are getting slaughtered as a result of the plunge in revenues...

Earnings for very large crude carriers, the industry’s biggest ships, plunged 75 percent from a year earlier to $11,624 a day, according to figures from Clarkson Plc the world’s largest shipbroker.  A surplus of the supertankers seeking charters in the Persian Gulf averaged 21 percent during the first quarter, the largest glut since 2009, according to market surveys by Bloomberg.

... and expenses: adding insult to injury, this year shippers have to deal with not only dropping revenues, but soaring input costs as well, ironically: fuel costs.

The exchange’s earnings assessments don’t account for speed reductions aimed at reducing fuel consumption, the industry’s largest expense.  Last year’s average price of $658.54 a metric ton was more than double the 2008 level, figures compiled by Bloomberg from 25 global ports show.

Absent some near-term miracle, it is likely that VLCC rates will continue tanking:

There are currently 22 percent more VLCCs seeking Persian Gulf cargoes than there are likely to be shipments over the next 30 days, according to a Bloomberg survey of five shipbrokers and owners today.  That was the same as last week.

Yet while Bloomberg is quick to go with the generic explanation and blame it all on the supply side, one can't help but wonder just how much of the drop off in charter rates is a function of what has been a major collapse in global trade in the past 6 months, coupled with a drop off in end demand for energy around the world.  Because while one can go with the myth of a US energy self-sufficiency, the same can certainly not be said for Japan, which is naturally the other half of the benchmark Gulf to Japan VLCC rate.

One therefore wonders just how much of a disconnect is there between the Japanese stock market, now reflecting solely the collapse in the Yen, and the underlying economy, especially if the Japan charter rate is indicative of the true state of the Japanese economic engine (or lack thereof):

UNQUOTE

Regards  —  Cliff

♠  From Wikipedia:  "The news portion of the site is written by a group of editors who collectively write under the pseudonym "Tyler Durden", a character from the novel Fight Club."