Japan's recovery key to turnaround in clean tanker market

An expected surge in demand for foreign oil products for power generation in quake-crippled Japan will support the clean oil tanker market in coming months to help sustain a nascent upturn in rates. Rising clean tanker rates could add to inflation pressures in major importers like China, India and other major commodity importers already battling soaring food and fuel prices.
The freight index for such vessels had plummeted after the global downturn and has been struggling to breakthrough a relatively tight trading range for the past year. Freight futures indicated a rise for Asia-bound clean tankers for the next four months. Forward agreements for the benchmark Middle East to Japan route for long range clean tankers traded at W142.30 for July, 18 percent higher than the W120.70 rate for the front-month March contract.
"We were looking for only a modest improvement in rates, but Japan could be enough to help change things," said Janet Lewis, a shipping analyst with Macquarie Securities. The index had dropped 7 percent last year as fleet expansion far exceeded demand with the global economy struggling to recover. It hit a high of 1,509 in June 2008, and was trading at 823 points on Wednesday.
Asia's second-largest economy has struggled to restore power supplies as electricity blackouts affect millions of homes, and to ramp up availability of gasoline to end queues of cars at fuel stations after the earthquake flattened buildings, factories and ports. The earthquake forced the shutdown of Japan's nuclear power capacity and nearly a third of its refining capacity, stoking the country's need for diesel, gasoline, liquefied natural gas and other oil products.
"In the long run, oil and product demand could rebound to levels that surpasses those seen pre-quake as the country rebuilds," said shipbroker Braemar Shipping Services. "Furthermore, with up to 10 nuclear reactors shutdown, Japan is likely to experience a shortfall in power generation capacity, and substitution with either fuel oil or coal will likely occur, increasing imports of these alternatives into the country."
The disaster, which has killed thousands, is the world's costliest ever natural disaster, with the government estimating damage at 15-25 trillion yen ($185 billion-$308 billion). The gap between fuel supplies and demand could rise once the reconstruction work starts.
"We haven't really seen the full impact yet to the clean tanker market," said a Singapore-based shipbroker. "There will definitely be an increase in rates, but by how much is still unknown since Japan's energy needs remain unclear." Imports were likely to be more focused on fueling utilities instead of filling a shortfall in refined products.
Some refining capacity has already come back online with JX Nippon Oil & Energy , TonenGeneral Sekiyu and Kyokuto Petroleum Industries restarted their affected refineries. Japan has also made available a total of 10 million kilolitres of oil, or 66 million barrels, from its reserve oil stocks. That will boost supplies by more than three times the refining capacity it lost during the earthquake, limiting fuel imports.
The quake initially shutdown refining capacity of 1.4 million barrels per day, or 31 percent of Japan's total of 4.52 million. "Moving forward several months to the early summer, we expect 650,000 barrels per day will remain shut," said analysts at J.P. Morgan.
Refineries are also ramping up output to ease supply shortages and boost stockpiles for reconstruction efforts. For crude oil tankers, the picture is less clear on what impact Japan's earthquake and recovery efforts will have on freight rates in the short term.
The shutdown of the refineries was estimated to have removed around 26 million barrels of oil cargoes, or 13 Very Large Crude Carriers worth. "More than 1 million bpd of Japanese refining capacity is closed with no restart plans, which will likely put continued pressure on VLCC rates until it is brought back online and inventories are restocked," said Michael Webber, analyst at Wells Fargo Securities.
The Baltic's dirty tanker index has eased 4 percent to a three-week low of 991 points since Japan's disaster, putting a end to a one-month rally that started in early February. Losses could be limited though by the unrest in the Middle East, especially in Libya where crude exports have ground to a virtual standstill, analysts said. A shortfall in Libyan crude is set to be substituted by supplies, albeit heavier grades of oil, from Saudi Arabia and also from more lighter crude from Algeria and Nigeria. Analysts say Saudi oil shipments will translate into longer journey times.