Frontline wary of 2H after record 1H

Norwegian tanker owner Frontline made its largest profit in more than 10 years in the first half of 2020, after a second consecutive strong quarter, but it warned of a depressed tanker market for the rest of the year.

The company made a profit of $199.7mn in the second quarter, up from $165.3mn in the prior quarter and just $1.1mn in the second quarter of 2020.

The first six months of 2020 brought dramatic crude demand correction "the likes of which we have never seen", it said. Land-based capacity quickly filled because of sudden weak demand, and a contango structure in the crude market encouraged traders to seek tankers for storage, resulting in a surge in demand for short-term charters and consequently in spot rates.

But freight rates have since receded and Frontline warned that they may take time to recover. It cited IEA forecasts in July for world oil demand to decline by 7.9mn b/d this year, before recovering by 5.3mn b/d to 97.4mn b/d in 2021. Production cuts from Opec+, and lower output from the US and Canada were the main cause of a nine-year low supply of 86.9mn b/d in the second quarter, and forecasts suggest that a significant portion of this cut would return in the next coming quarters, Frontline said.

Frontline expects global demand for crude shipping to gradually recover in the medium to long term, but said that the usual seasonal strength during the winter months should not be expected purely based on historical data.

Long-term fundamentals

Frontline expects that slowing fleet growth should lead to a sustained period of higher rates in the long-term. This year's orderbook of just 69 VLCCs to be delivered is the lowest since 1997.

The average age of the global very large crude carrier (VLCC) fleet at the end of the second quarter was the highest since 2002. Frontline calculates that 65 will be older than 20 years at the end of 2021, and an additional 85 will be older than 17.5 years.

The shipowner has a forward bunker purchase contract for 5,000 t/month, which it reported in its first-quarter results, for delivery between October this year and December 2021. Under this contract, Frontline will buy fuel between $325-365/t. It said today that it has since signed another forward purchase deal for 5,000 t/month for delivery throughout 2021 at $232/t. The firm has a marine fuel supply joint venture with Norwegian dry bulk company Golden Ocean and trading firm Trafigura, called TFG Marine, of which it owns 15pc.

As of June 30 Frontline's fleet consisted of 71 vessels — 20 VLCCs, 29 Suezmaxes, 20 Aframax tankers and two vessels chartered in from an unrelated third party.

By Nikos Kokolinakis and George Collard