Analysts debate if high 2004 tanker rates will repeat in 2005

New York (Platts)--29Dec2004

The shocking run-up in tanker freight rates this year was attributed in part
to higher Far East demand, but is that enough to keep rates strong in 2005?
Yes and no, say analysts. An estimated 15% jump in China's 2004 oil demand
helped lure crude supply to the Far East and tightened tanker markets, pushing
freight rates to new highs. But rates have since moved lower. Platts Middle
East-Far East route VLCC rates surpassed the W200 level for the first time in
October, and then moved above W300 in November. That compares to an average of
about W99 in 2003, and W51 in 2002. The Platts tanker assessment for 260,000mt
from the Arabian Gulf to the Far East has since subsided to W105, with roughly
60 points of that drop coming in just the last few trading days. The 105 rate
was assessed for Dec 29, with one individual charter done at less than W100.
West Africa-Far East VLCC rates in November also surpassed the W200 level.

The same 2003 assessment averaged W88, while 2002's average was W45. The
latest Platts assessment for 260,000mt from West Africa to the Far East has
eased to W160. An anticipated reduction in the call on OPEC crude, along with
the combination of more incremental oil supplies from Russia, Brazil and West
Africa, create a "tonne-mile effect" of weaker demand," said Smith Barney
analyst John Kartsonas in a December report. He explained to Platts that
increased Russian and Brazil production next year should replace longer- haul
Mideast crude that usually heads to Northwest Europe and Brazil, respectively.
At the same time, Kartsonas expects freight-rate booster China's oil demand to
be cut by around half in 2005 to 8%-9%. "The trading pattern is changing,"
said Kartsonas.

Kartsonas said he expects 2005 freight rates to drop an average 30% below
2004. Still, "it's going to be a good year for tankers," he said, noting the
market just won't match freight rates seen in "the miracle year" of 2004.
Market fundamentals support freight rates "nowhere near current levels,"
Kartsonas said. As an example, he cited the historical correlation between
Mideast production and freight rates over the past few years. Kartsonas said
the Platts' 21.4-mil b/d October output estimate for the Middle East (Iran,
Iraq, Kuwait, Qatar, Saudi Arabia and the UAE) suggests a $100,000/d average
global VLCC dayrate. Instead, that dayrate was around $200,000 in November, he
said. Kartsonas forecasts the 2004 average global VLCC rate to be about
$90,000/d, up from $55,000/d in 2003 and $23,000/d in 2002. In 2005, he
predicts an average $60,000/d VLCC rate.

In contrast, Jeffries analyst Magnus Fyhr expects tonne-mile demand to
increase in 2005. "While a majority of the incremental oil production in 2005
is projected to come from Russia and West Africa, we believe the tonne- mile
demand is likely to increase due to new transportation routes and trading
patterns as Chinese imports of sweet crude oil from the North Sea and West
Africa have increased dramatically during the past year," he said in a
December report. Fyhr expects global fleet utilization to remain above 90% in
2005 after moving close to 100% in late 2004.

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