Pirate Attacks Fail to Revive Tanker Rates as Oil Demand Slows

By Alaric Nightingale

Nov. 25 (Bloomberg) -- Oil shipping costs may extend this year's 76 percent rout as shrinking energy demand and a global recession eclipse disruptions caused by pirates off east Africa capturing their largest-ever freighter.

Tanker rates next month are about 7 percent lower than yesterday's level on the Persian Gulf to Japan route, according to derivative contracts called Forward Freight Agreements that trade privately among banks, brokers, hedge funds and shipping companies. Transport costs plunged this year as OPEC curtailed production, lowering demand for vessels.

Somalian pirates seized their biggest-ever prize on Nov. 15, a ship loaded with 2 million barrels of crude, worth a combined $250 million. The hijacking prompted Frontline Ltd., the world's biggest tanker operator, and owners controlling almost a quarter of the fleet to say they may avoid the region, lengthening journeys and effectively reducing ship supplies.

``It would be too strong to say it would become a huge constraint'' to vessel supply, Andreas Sohmen-Pao, chief executive officer of BW Shipping Managers Pte., which controls 17 supertankers, said from Singapore Nov. 20. ``It would reduce capacity, but not to an alarming level.''

Shipowners are already contending with recessions in the U.S., Japan and Europe that have sapped demand for energy. The 13 members of the Organization of Petroleum Exporting Countries curtailed production for three consecutive months. The group also agreed to reduce output this month and meets again Nov. 29. The International Energy Agency, an adviser to 28 nations, cut its global oil demand forecast the most in 12 years on Nov. 13.

Shipping Hedge Fund

The cost of shipping Middle East crude to Asia, the global benchmark, has fallen to 66 Worldscale points from almost 277 points at the end of last year. Worldscale points are a percentage of a nominal rate, or flat rate, for more than 320,000 specific routes. Freight derivatives for December settlement are trading at about 61.5 Worldscale.

Longer voyages around South Africa's Cape of Good Hope, avoiding Egypt's Suez Canal and the Gulf of Aden above Somalia, won't change much, said Andreas Vergottis, research director at Tufton Oceanic Ltd., the world's largest shipping hedge fund group. Expanding inventories and weakening demand would have prompted refineries to seek slower deliveries, he said.

``In a slack market, this is happening anyway,'' London- based Vergottis said by phone Nov. 20. ``It's just convenient for everybody.''

Sailing at 14 knots, it takes 33.2 days to ship Saudi Arabian crude oil to Rotterdam via the Cape of Good Hope, compared with 19.2 days going through the Suez Canal, according to the world-register.net Web site. When rates are higher, shipowners will seek to speed deliveries.

Economic Contractions

``There's an economic case for going through the Suez and that works better when the market is higher,'' Martin Stopford, London-based executive director at Clarkson Plc, the world's biggest shipbroker, said Nov. 20.

The International Monetary Fund on Nov. 6 predicted economic contractions in the U.S., Japan and euro region next year. The Organization for Economic Cooperation and Development on Nov. 20 said the economy of its 30-member nations shrank for the first time in seven years during the third quarter.

There have been about 97 supertankers booked to load at Middle East ports in November and there probably aren't any more cargoes, said Nikos Varvaropoulos, an official at Optima Shipbrokers in Athens. There are normally about 105 a month.

The drop in shipments has left the market with ``plenty of vessels'' and ``no cargoes,'' Varvaropoulos said Nov. 21.

Canal Pipeline

About 61 million metric tons of Middle East crude oil were shipped northward through the canal and an adjacent pipeline in the first half of 2008, according to data from Lloyd's Marine Intelligence Unit. That's about 2.45 million barrels a day, or 12 percent of Europe's daily oil consumption.

The five-member Bloomberg Tanker Index, led by Hamilton, Bermuda-based Frontline, plunged 63 percent since June.

The Somalian pirates demanded $25 million in ransom for the Saudi Arabian supertanker. Since January, at least 91 vessels have been attacked in the Gulf of Aden, an area flanked by Yemen and Somalia.

``My gut feeling is that this problem is going to subside,'' said Finn Engelsen, managing director of Oslo-based shipbroker Lorentzen & Stemoco A/S. ``It's going to be solved one way or another.''

The European Union last month joined the North Atlantic Treaty Organization, India, Malaysia and Russia in deploying vessels to combat piracy.

To contact the reporters on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net