Oil-at-sea storage seen lifting shipping rates to six-year high

LONDON (Bloomberg) - Supertanker owners from Tokyo to Athens said demand to store oil on vessels is strengthening, with Morgan Stanley and Evercore Partners predicting the highest shipping rates in six-years are possible.

Frontline, Nippon Yusen Kaisha and Dynacom Tankers Management, who control 11 per cent of the fleet, said orders are multiplying as the global oil glut expands. The demand is typically to store for at least six months, according to all three tanker companies.

Brent crude plunged 60 per cent since June amid signs OPEC nations are unwilling to tackle a global oversupply they say was caused by U.S. drillers and other producers. The price of oil for delivery at later dates is so far above current costs, a market structure known as contango, that it can be profitable to store cargoes and lock in returns now in the futures market.

"This is going to tighten the market and make the entire market move higher," said Fotis Giannakoulis, an analyst at Morgan Stanley in New York,. "If contango keeps deepening it wouldn't be a surprise" for the biggest tankers to earn more than US$100,000 a day, he said.

Tankers shipping Middle East oil to Japan, a benchmark route, earned US$83,853 a day on Wednesday, according to prices from the Baltic Exchange in London. The rate last exceeded $100,000 a day on July 30, 2008, its data show. An increase to that level may only be temporary because the contango "cannot" stay high enough to drive up storage for "too long", Giannakoulis said.

As much as 58 million barrels of tanker capacity has been booked in the past several weeks with storage options, estimates Galbraiths Ltd., a London-based shipbroker.

"If more and more ships are used for storage and taken out of the trading fleet then yes, I think that's the type of event that would need to take place for it to get to US$100,000 a day," said Jonathan Chappell, a shipping analyst in New York for Evercore.

Brent crude for February settlement was about US$7 cheaper than for August on the ICE Futures Europe exchange at 6 p.m. in London on Wednesday. A gap of about US$6.50 is enough to cover hiring a ship and other costs associated with the trade, according to E.A. Gibson Shipbrokers Ltd. in London.