The Hindu Business Line : Surge in VLCC rates keeps sails high for shipping industry

AN unexpected surge in the freight market for very large crude carriers (VLCCs), driven by a growth in demand for crude, has been making the going good for shipping companies during the last few weeks. With the recently revised estimates for global oil demand projecting a buoyant freight market for VLCCs in the coming months, the shipping companies, especially those that are active in this segment, can expect to have a smooth sailing in terms of revenue earnings in the remaining part of the current fiscal, industry analysts say.

Going by brokers' reports, the daily spot earnings for VLCC in the global market increased from $59,410 on July 1 to $64,112 on July 8, to $68,400 on July 14 and to $70,087 on July 15.

Market reports indicate that Reliance booked some crude parcels in VLCCs for a rate close to $80,000 earlier this week.

Analysts feel that this is an unusual trend as normally in the summer months VLCC market is never expected to touch such high levels, given that demand for crude is usually slack, as compared to the winter months.

For example, the spot earnings for VLCC in July 2003 hovered between $16,429 and $18,000 per day — a far cry from the rates this time around.

"In fact, the average daily spot earning in the first quarter of the current fiscal was $53,290 ($36,456). Then while the rates dropped to $26,472 in the second quarter of last fiscal, those in July this year are touching as high as $70,000. This is an unprecedented surge in the market," according to an analyst.

The buoyancy in the market can be traced to the increased crude supply. Reports from the International Energy Agency, Paris, indicate that world oil demand growth is likely to remain at a high of 2.5 million barrels per day in 2004, the global demand forecast for the year being pegged at 81.4 million barrels per day. Even OECD industry oil inventories were seen to rise to 2,506 million barrels in May, which was 12 million barrels higher than last year.

In fact, the IEA has revised oil demand estimates for the sixth time in 2004 to 80.9 million barrels per day (MBD) for the summer months, which, by itself, was unusual. This projects a fundamentally strong market for crude ahead, as it is a 24-year high number, marking a total increase of 2.3 MBD from 2003 levels, with one third of the increase in demand flowing from "energy-starved" China, analysts say.

The second factor is the increase in production by OPEC to meet the increased oil demand — OPEC-10 boosted May crude supply to 26.1 MBD, while OPEC agreed to raise production targets by 2 MBD to 25.5 MBD from mid-July.

"All this indicates good time for shipping companies, as there is a definite co-relation between OPEC production and VLCC freight rates, with the coefficient of co-relation between the two being as high as 0.9," an analyst pointed out.