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Oil shipping bonanza?
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December 1, 1997: 12:54 p.m. ET
OPEC increase means tankers will see more business and higher rates
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NEW YORK (CNNfn) - Super tankers, those behemoth ships that move barrels and barrels of crude oil across the world's oceans, are likely to become money machines, thanks to OPEC.
Over the weekend, the oil cartel announced plans to increase oil production by 1 million barrels a day as part of an effort for Middle East oil producers to regain market share.
"Any increase in Middle East oil market share is very positive for the tanker business, because the Middle East is the producer farthest from major oil consumption markets," said Jim Winchester, a shipping analyst with Lazard Freres.
For the tanker industry, the new OPEC target could translate into enough traffic to keep 42 large tankers busy in addition to the current fleet, Winchester estimates. That should have an immediate impact on freight rates, he said.
"This is a business where a 1 or 2 percent change in production has a significant impact on freight rates, so this should have an effect, especially with things as tight as they are," Winchester said.
"It should be beneficial to owners of large ships," a tanker broker agreed.
After several down years, tanker rates have recently increased, ship brokers reported. From below $30,000 a day, spot rates have jumped in recent weeks to over $40,000 a day in some trade lanes, with most of the available ships employed. An OPEC production increase should boost demand for ships and push rates to even higher levels, brokers suggested.
That, in turn, should help the bottom line of companies with substantial tanker fleets, like Overseas Shipholding Group (OSG) and Frontline, a Swedish shipping company that plans to offer shares on U.S. exchanges in January, Winchester said.
But how long-lived the boom will be is subject to debate.
"Any time you get an increase in OPEC production, you have a positive impact on the tanker sector," Jim Dowling, an analyst with Furman Selz LLC, said. "But the key question is, how long will that last?"
Dowling said an increase in production won't necessarily guarantee an increase in consumption. He also noted that world supply patterns could change, which also would affect how much business tanker operators actually receive.
Others pointed out that ships currently on order at shipyards will start hitting the market in coming months. Even though some active tankers are scheduled for demolition because of their age, the incoming ships could push more supply onto the market and bring rates down, they argue.
"Rates have been at an all-time high, but they are showing signs of breaking," said Sidney Levine, president of Shipping Intelligence, a shipping data analysis firm. "The most this [increased OPEC production] would do is postpone the break for a while."
-- by staff writer Allen Wastler
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