01-06-2016

Tankers: Norway’s Frontline sees forward tanker demand to be strong

Frontline

Norway’s Frontline, one of the world’s biggest independent tanker groups, said Tuesday it had a bumper first quarter in a buoyant market and it saw strong tanker demand going forward.

“Record crude production, and oil prices which are expected to be relatively low, coupled with steadily increasing demand for crude oil, have significantly tightened the crude tanker market and continued to generate strong freight rates,” the group said.

Oslo-listed Frontline, part of the group of companies controlled by Norwegian shipping billionaire John Fredriksen, said it outperformed the market in the first quarter, which saw periods of significant strength, and the market continued to show high levels of volatility.

“As we are now well into the second quarter earnings have softened, but we expect forward tanker demand to be strong,” Frontline said.

It said crude oil demand from China and India was continuing to rise.

In April, China imported 7.96 million b/d of crude oil, and Chinese crude oil imports rose 11.8% over the first four months of 2016 compared with the same period in 2015, it said.

Frontline said incremental demand was being generated by Chinese teapot refineries, a trend that was expected to continue in coming months.

Growing Chinese car sales and healthy refinery margins had also been positive for the product tanker market.

The company said that in addition, increasing near-term OPEC supply and declining US production was supporting tanker demand by increasing voyage lengths, which has the effect of reducing available supply.

“The company believes the primary downside risk for tanker demand relates to decreasing global oil production,” Frontline said. “Rising oil prices is another factor which can affect our markets negatively through a fall in oil demand and rising fuel cost for our vessels.”

A decline in non OPEC and non US production also had the potential to negatively affect tanker demand, it added.

“We believe that it is unlikely that OPEC will cut production as Iranian production is increasing and Saudi Arabia has indicated an unwillingness to reduce production,” Frontline said.

But it also saw a fall in US production as being likely and a positive for the tanker market, although recent supply disruptions in West Africa was a reminder crude tanker demand was susceptible to unforeseen circumstances.

Frontline said newbuilding deliveries were accelerating, particularly in the second half of 2016 and into 2017.

“We believe steady demand growth and increasing discrimination against older vessels may help absorb these deliveries,” it said.

“Thus far in 2016, 17 VLCCs have been added to the global fleet without a noticeable impact, but the number of vessels due to be delivered in the next 18 months remains substantial,” it added.

Frontline said there had been a notable lack of new orders in 2016 and it expected constraints in debt financing would continue to restrict new orders.

Frontline said shipyards were also under pressure to restructure and a reduction of capacity at certain yards is expected.

“In our opinion these factors support a positive long-term outlook for the tanker sector. All factors considered we believe in a healthy tanker market with only modest decrease in utilization in the near term,” it added.

CEO Robert Hvide Macleod said Frontline’s newbuilding program was proceeding according to schedule.

Five LR2 tankers from its newbuilding fleet were delivered so far in 2016. Macleod said an additional six newbuilding deliveries were expected in 2016, and the final 17 vessels were expected to be delivered in 2017.

The CEO said the newbuilding program included nine LR2 tankers, excluding the five that were already delivered in 2016, that could carry both crude and refined products.

Frontline reported Q1 revenue of $227.1 million, up from $93.5 million for the same period a year ago.

They were helped by VLCC spot rates which in Q1 came in at $70,200/day compared with $62,700/d in the fourth quarter. VLCC time charter daily rates were also up in the same period.

The company reported Q1 net profit of $78.9 million compared with $11.0 million for the first quarter last year.

Source: Platts

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