BUY OR SELL-Oil on the boil: a two-edged sword for crude carriers
* Higher oil prices to spur demand, shipments ...
* ... or hit demand, shipments
* Exposure to spot market is good ...
* ... or not so good
By Krishna N Das and Vaishnavi Bala
BANGALORE, March 9 (Reuters) - Shares of companies that own oil tankers have perked up as crude oil prices have jumped to 2-1/2-year highs on fears that unrest in North Africa and the Middle East could disrupt supplies.
Trading sources say Libya's oil trade -- the country is Africa's No.3 producer -- has virtually been paralysed as banks decline to clear payments.
The S&P 1500 Oil & Gas Storage & Transportation index , which rose by a fifth last year, has already gained 17 percent so far this year. Shares in Frontline Ltd , the world's No.1 independent oil tanker company, are up 13 percent in the last 7 weeks, after losing 7 percent in 2010.
To reflect a tighter oil market, BofA Merrill Lynch has raised its second-quarter forecast for Brent crude to $122 a barrel, from $86 previously.
Some analysts say higher oil prices will help offset an over-supply of tankers -- as buyers secure supplies against further price hikes -- but others reckon geopolitical issues cannot compensate for weak fundamentals.
Too many tankers and a weak global economy have in recent years squeezed the pricing power of tanker firms such as Frontline, Teekay , Crude Carriers , Nordic American Tanker Shipping and 2nd-ranked independent Overseas Shipholding .
Michael Webber at Wells Fargo Securities said tanker stocks' multi-year lows and a gradually improving demand-supply scenario make a 'buy' case.
"We've actually seen a lot of (tanker) supply discipline in the past 6-9 months, so the long-term supply side is getting better. I'm optimistic and bullish that it's more of a longer-term call," he said, adding his preferred stocks are Overseas Shipholding, Frontline, Crude Carriers and Nordic American.
Webber noted that volatility related to Egypt's recent popular uprising could also be key to determining tankers' daily rates.
"The names we'd favour would be firms that have significant spot market exposure that would benefit from an improving rate environment," said Douglas Mavrinac, analyst at Jefferies.
"We're negative on tankers, lower than consensus," said RS Platou Markets analyst Dag Kilen, predicting VLCCs (Very Large Crude Carriers) would earn $23,000 a day on average this year and $19,000 next year.
VLCCs, which are among the biggest tankers and can ship up to 2 million barrels of oil, commanded average day rates of close to $200,000 as recently as 2008.
Taking a contrarian stance, Kilen said civil unrest in the Middle East and North Africa could actually hit demand for oil -- and shipments.
"Our main concern earlier was the supply of vessels," he said. "The turmoil has increased the risk for demand destruction ... shipping is a volume game and news of output shortfall is thereby considered a negative."
CEO Rex Tillerson said on Wednesday that Exxon Mobil was not seeing any demand destruction as a result of higher oil prices.
Kilen was also negative on Frontline, given the company's high dividend expectations, "as it has both missing funding for capex and refinancing needs through 2012".
High spot market exposure makes Kilen negative on Overseas Shipholding and Denmark's Torm A/S .
Cantor Fitzgerald's Natasha Boyden, a 5-star StarMine marine sector analyst, said she would avoid General Maritime , and Overseas Shipholding, because of that exposure.
"Our outlook remains fairly bearish in the short term (6-12 months) due to (tanker) supply concerns ..." she added. (Reporting by Krishna N Das and Vaishnavi Bala, Editing by Ian Geoghegan)
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