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Charter rates to rise as crude hoarding widens

Saleh Al Shamekh (SUPPLIED)

By Ashaba K Abdul Basti

Tanker owners are expecting charter rates on most voyages to firm up in the coming days as the practice of storing crude oil on supertankers reaches record levels, said senior industry players
and analysts.

More than seven per cent of the current total fleet for VLCCs (very large crude carriers) has been booked for crude oil storage.

Oil producers, refiners and several investors are putting surplus volumes in floating storage in the hope that crude oil demand and prices will rise sharply in the next four months, a practice widely referred to as contango.

Charter rates for VLCCs on key spot markets in the Middle East have increased by 17 per cent this week compared to last week, with most analysts predicting a further increase in the coming weeks as the practice of contango widens.

"A sizeable amount of tonnage is being taken away from the existing fleet, which has narrowed the supply-demand gap," said Mathieu Philippe, Middle East General Manager for Barry Rogliano Salles (BRS), a Paris-based ship broking company. "Freight rates have firmed up as the practice of hoarding oil spreads. Tanker owners are benefiting from this situation by getting employment for several of their VLCCs."

Philippe said that only double hull VLCCs are being demanded for storage purposes, adding that daily hire rates could be slightly lower than the normal daily charter rates on employments for voyages. He said that the practice was being conducted on a large scale, with demand for supertankers needed for crude oil storage increasing daily.

"The demand is unprecedented. Although we have situations where crude oil is stored on tankers mainly for political reasons, it has never reached this extent," said Philippe. The cost of delivering Middle East oil to Asia, the world's busiest route for supertankers, rose last week for the first time since December 5, and the sudden flurry of activity after a dead quiet period has been largely attributed to the practice of contango.

Daily returns on double hull VLCCs for eastern destinations jumped in from less than $40,000 (Dh146,800) to about $60,000. Similarly, a voyage to Europe raised from $30,000 a day to about $50,000 by weekend.

Future markets globally have indicated that oil prices will rise in the months ahead as production levels reduce. Crude oil due for delivery in December stood at more than $60 a barrel last week.

Traders too are keeping a sizeable amount of crude away from the market to create demand and are betting that prices will rise to $45 or $46 a barrel by April or May, from $39 a barrel yesterday.

At least 35 supertankers owned by several shipping companies in the region are being used to store oil at sea, according to Saleh Al Shamekh, President for Oil and Gas at the National Shipping Company of Saudi Arabia (NSCSA).

"A sizeable amount of vessels in the regional fleet has been removed and this is good for our charter rates on the spot market," said Al Shamekh. "Demand is growing too as the practice of crude oil storage on tankers increases, this will keep the sector healthy in the coming months."