Gulf to Japan VLCC freight hits four-year low partly due to Opec cuts

Gulf to Japan VLCC freight hits four-year low partly due to Opec cuts Reuters Published: August 19, 2007, 23:05

London: The world's main crude export route sank to a four-year low last Tuesday, hit by strong fleet supply, long-standing Opec cuts and refinery maintenance in Asia, according to brokers and analysts.

The Very Large Crude Carrier (VLCC) route from the Gulf to Japan struck W50 - its lowest level since October 2003, according to Reuters data.

The London Baltic Exchange confirmed the physical spot trade on the route at W49.97 - an average between single and double-hulled oil tankers on the long-haul voyage.

Japan is Asia's biggest importer of crude oil, closely followed by China. More than two-thirds of the Gulf's oil flows to Asia.

Brokers Simpson, Spence & Young cited a bout of refinery maintenance in Japan at the end of August and South Korea as a further reasons for the weakness.

Other core rates from the Gulf to the United States and out of the Atlantic Basin - West Africa and the North Sea - to the United States have already struck four-year lows.

Long-haul routes

Despite strong world crude demand and buoyant economic growth, major long-haul crude export routes - including those from top producers in the Gulf - have been hit hard by strong fleet growth and long-standing Opec cuts this year.

The Organisation of Petroleum Exporting Countries decided last year to lower output by 1.7 million barrels per day (bpd), equivalent to a VLCC's worth a day from the market.

The group is meeting about 900,000 bpd of the promised reduction, according to a Reuters survey of July output.

High stocks in the United States and a backward dated Nymex crude futures market since mid-July have pressured export flows and correspondingly rates, as traders delay buying.

A heavy round of refinery maintenance in the world's biggest consumer and unscheduled stoppages have also squeezed flows. "Oil tanker movements suggest oil in transit is well below seasonal norms, especially on westbound routes, and will remain so for several weeks," the International Energy Agency said in a report last week. "In the Atlantic Basin, production outages and economic run cuts in Europe offer further downside to prospective crude vessel interest," it said.

Sharp contrast

The slide on crude freight markets is in sharp contrast to ocean freight for dry commodities - a different sea freight sector - which continues to smash records. Some analysts said the new freight lows on crude were on a nominal basis only because the 'real' or dollar per tonne price was higher on a Time Charter Equivalent basis due to starkly higher ship fuel (bunker) costs this year.