Oil tankers: tidal recall

One of the doyens of shipping, septuagenarian John Fredriksen of Norway, says he has no plans to retire soon. One might forgive him if he did. His offshore empire has definitely taken on water over the past few years, but there are signs that the oil tanker market has bottomed out.

Shares in Frontline, Mr Fredriksen’s oil tanker company, and rig specialist SeaDrill are both down well over half from their highs.

Last week came another indignity. His attempt to double his bet on oil tankers by acquiring US-listed DHT Holdings was thwarted by the latter’s acquisition of 11 very large crude carriers (VLCC) from Bermuda-based BW Group.

VLCC rates are at historically deep depths, the second lowest in a decade for this part of the year. The running expenses for one of these near quarter-mile long behemoths is $20,000 daily, including interest costs and amortisation, note brokers Pareto. Compare that to current rental rates at $15,000.

That probably explains Mr Fredriksen’s contrarian interest in DHT — he is betting rates can only go up. The same belief is also why DHT is not ready to surrender its flag just yet.

These tankers are low priced for a reason, though. A surge of new builds has led to oversupply. One indicator of this surfeit comes from the price ratio of used VLCC vessels to new ones, about 74 per cent.

When business was brisk, buyers would bid up five-year-old tankers towards parity. Add to this the Opec production cuts, which mean less oil shipped, and the low rates make sense.

There is, however, a quirky positive signal in the market’s favour. Capesize dry bulk carrier rates are higher than VLCCs’. Granted, the former specialise in coal and iron ore, not directly correlated with oil prices. Yet historically it is rare for capesize vessel rates to exceed VLCCs’ for long without the latter following suit.

Oil tankers may look stuck in the sand. In fact, their owners can see rising waters ahead.

Email the Lex team at lex@ft.com