Could OPEC Extend Its Grasp to Oil Tanking?

(MoneyWatch) 

• The Company: Overseas Shipholding Group, one of the largest oil tanker companies in the world
• The Filing: Schedule 13D filed with the SEC on July 10
• The Finding: Bermuda-based Frontline, the leading oil tanker in vessels capable of carrying between 120,000 and 320,000 in deadweight tons, wants to talk with the management of Overseas about a possible deal. As control of supply slips further from the grasp of OPEC-member nations, I am left to wonder if a Gulf-producing oil nation might look to acquire an oil tanker company, too.

The Upshot: An expanding scale of international contracts and locked-in future time-charter revenue of more than $1.28 billion makes Overseas an attractive acquisition.

Overseas has one of the healthiest balance sheets in the industry, with $1.98 billion in liquidity and adjusted debt of 30.8 percent, modest by industry standards.

The global Very Large Crude Carrier (VLCC) fleet supply (for long-haulage) stood at 475 vessels in April 2008, down from 483 units at January 1, 2007. Stable supply combined with strong crude oil prices and higher production demand generated average day spot time-charter rates at Overseas in the first-quarter ended March 31 of about $99,000 -- two times the first quarter 2007 average price.

The rate outlook for 2010 and 2011 is compelling, too, as single-hull tankers are phased out and/or converted for dry bulk use.

OPEC said today that the need for its oil in 2009 would show the first significant decline in demand since 2002, due to higher crude prices and the slowing U.S. economy.

Demand for tanker demand has historically run parallel to OPEC production. Consumption increases in China and India combined with rising supply from non-member countries in West Africa and states from the former Soviet Union, however, will offset softening exports in the Middle East, raising forward visibility of the tanker trade.

Vertical ownership of the producing fields, pipelines, and storage infrastructure has historically helped the OPEC-8 members located in the Gulf Region to manipulate prices for its crude. The only OPEC-8 nations to own and operate fleets of crude oil and liquefied gas tankers are Kuwait (KOTC) and Iraq.

The Question: As price leverage slips further from their grasp, what is to prevent OPEC nations from buying up oil tankers -- with their excess billions in oil revenue -- to choke supply and reassert control over markets?