China's supertanker traffic jam propels global shipping rates

Supertankers hauling crude to China are contending with increased waiting times to unload as some on- land storage depots reach capacity amid an oil-buying binge by the world's most populous nation. 

PHOTO: BLOOMBERG

OCT 12, 201512:26 PM

[LONDON] Supertankers hauling crude to China are contending with increased waiting times to unload as some on- land storage depots reach capacity amid an oil-buying binge by the world's most populous nation.

At least 19 two-million-barrel-capacity ships - known as VLCCs - were stationed off China's coast for two weeks or more, according to vessel-tracking data compiled by Bloomberg on Oct 9. In normal market conditions, most would normally arrive at a port and depart within a day, according to George Los, a New York-based analyst at shipbroker Charles R. Weber Co. As delays have increased, benchmark daily earnings for the tankers jumped above US$100,000 this month for the first time since the global recession.

This tanker traffic jam shows just how much crude the world's second biggest importer is buying at a time when economic growth is forecast to slow to the lowest level in 25 years. China's purchases have jumped almost 10 per cent this year from 2014, and could help keep prices from crashing to levels envisioned by banks such as Goldman Sachs Group Inc., which has said US$20 a barrel oil is possible.

"It's the same as your closet being full of clothes, but you keep shopping if you see a bargain," said Halvor Ellefsen, a ship broker at Galbraith's Ltd. in London, which arranges vessel charters. "The oil price is low, and we are soon into the winter season, when more oil will be needed."

The delays in unloading are being caused by a lack of space in some storage tanks as China increases cargo purchases, according to Ellefsen. The country has amassed 200 million barrels of crude in reserves as oil prices slump, and aims to have 500 million barrels by the end of the decade, according to the International Energy Agency in Paris. The delays could get worse because of a surge in bookings last month that will result in even more ships arriving later this year.

Day rates for ships delivering Saudi Arabian crude to Japan, a benchmark route, reached US$106,381 on Oct 5, the most since July 2008, data from the Baltic Exchange in London showed. That's about 10 times more than operators need to cover daily running costs including crew, repairs and insurance, according to estimates from Moore Stephens, an industry consultant. Daily earnings on the benchmark route fell as low as US$7,850 in August 2012 amid a vessel glut.

The jump in rates has boosted owners of the ships, according to Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. Euronav NV, Europe's biggest owner, rallied about 35 percent in Brussels this year, extending an 20 per cent advance in 2014. Frontline Ltd, led by billionaire John Fredriksen, surged about 40 per cent, while DHT Holdings Inc. added about 15 per cent.

"Delays will tie up tonnage which would otherwise sail and move cargo so that's removing the available vessels," Mr Stavseth, said by phone Oct 9. "Given winter is usually a stronger time, the net effect is that rates should remain higher than people have expected." VLCC daily earnings can swing by tens of thousands of dollars in a single week because of their sensitivity to changes in supply and demand of cargoes and fleet availability. Globally, they will earn an average of US$55,000 a day in the fourth quarter, a 17 per cent increase from the previous period, according to the average of eight analyst estimates compiled by Bloomberg.

Chinese traders booked a record number of ships in the spot market during the week ended Oct 2, and when those tankers deliver their crude cargoes, it could add to the waiting times, said Los at Charles R. Weber. The influx of oil has already created what ship operators call ullage issues, in which shore tanks are so full that they must be emptied before vessels can unload.

"With the ullage delays remaining high, the eventual arrival of more units will likely lead to a continuation of elevated delays," said Los.

BLOOMBERG