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By Samuel R. Avro on Nov 25, 2008 with no responses

Pirate Attacks Fail to Revive Tumbling Tanker Rates

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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.”

Article continues… Bloomberg