Page 43: of Maritime Reporter Magazine (June 1998)

volatile nature of freight rates in this sector, coupled with a number of listed companies that have heavy exposure to the market.

At the time of the Gulf Crisis

VLCC rates were providing returns in excess of $50,000/day for some voyages and optimism was considerable, principally given the aging nature of the fleet with its mid-1970s built vessels.

As regulations were also being tightened and double hulls intro- duced under OPA90 a further impetus was added to the concept that ageing vessels would have to be scrapped. The reality proved otherwise — as a heavy weight of tonnage was added to the fleet from the orderbook, freight rates began to reduce. And it soon became clear that many vessels would have no trouble passing their supposedly difficult fourth special surveys around 20 years of age. Thus in the early 1990s freight rates were returning aver- ages on a spot basis of perhaps $10-15,000/day.

A number of factors then came into play — principally a surge in oil demand in Asia prompted by the commissioning of new refiner- ies.

Consequently, while demand increased by just one percent in 1996. it then rose by 4.7 percent in 1997. With just five vessels added to the fleet in 1996 and eight in 1997 it was clear that the market surplus was beginning to contract.

And illustrative of this improve- ment was the fact that VLCC demolition resulted in just seven removals in 1997, down from 23 in 1996 and 28 from 1995. The speed with which rates can improve was shown by the fact that in 1997 spot rates AG-Japan had tripled from their 1994 levels.

Going into the early part of 1998, booming OPEC output once again resulted in an upside surprise on the demand side, prompting rates to recover strongly from an uncer- tain end year position prompted by the Asian slowdown. With just two

VLCCs delivered to the fleet in the first three months of 1998 and only 10 scheduled for the remainder of the year, demand will again prove important. Even with cutbacks announced by OPEC, it is difficult to see VLCC demand falling below 1997 levels implying a reasonably tight market for the remainder of 1998.

Unfortunately, fundamentals will not always win the day. It has already been noted that the out-

June, 1998 look for product tankers is poor, while there is con- siderable uncertainty over the Aframax mar- ket, and even Suezmax rates are unlikely to strengthen.

Thus, attention and sentiment is likely to focus heavily on the VLCC orderbook which stood at 72 vessels at the end of March 1998. This shows that the market will have to absorb a consider- able weight of tonnage through 1999 and 2000.

The key to freight rates will thus be the extent to which vessels are removed from the fleet.

There is little reason to antici- pate a surge in demand in 1998 and consequently the probability is that VLCC rates will have peaked by the end of 1998 and, if not, 1999 will almost certainly mark the next cyclical peak.

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