Sluggish demand for crude oil, worries over economic recovery and rising fleet supply will pressure Middle East tanker earnings in 2011 despite hopes for firmer rates in the fourth quarter of this year, analysts said.

Average earnings on the benchmark Middle East Gulf to Japan route have fallen in recent days to around the operating cost level of $10,000 a day as very large crude carriers (VLCCs) return from floating storage due to the end of a trading play, which at one point saw over 100 million barrels stored at sea.

The rise in tanker availability has been compounded by new vessel deliveries ordered before turmoil in 2008 entering a growing VLCC fleet already competing for business.

"The supply side will only get worse -- we expect 2011 to be the peak in VLCC deliveries with approximately 75 new ships hitting the water next year," said Tim Smith, senior analyst with consultants MSI.

"It is likely that the VLCC market will remain under pressure unless we see stronger than expected global oil demand combined with sharply improving OPEC output and a return of floating storage."

The weaker rate environment, also due to slower seasonal demand in the third quarter, has prompted Frontline, the world's biggest independent tanker operator, to anchor some of its vessels. Its main owner John Fredriksen said last week the crude tanker market will struggle to make profits in the coming years due to economic uncertainty.

"The spot market right now is hovering at levels that are barely covering owners operating cost, and owners are starting to resist doing business at these levels," Maersk Tankers chief executive Soren Skou told Reuters.

"It will take more demand to achieve a major improvement as there are still around 25 (VLCC) new buildings to deliver this year."

Over 40 VLCCs -- among the biggest vessels in the world tanker fleet -- were storing crude oil at sea at the peak in the past year as part of a price play where oil traders stored cargoes at sea with a view to selling them later at higher prices. The total VLCC fleet was estimated around 550 to 580.

Fourth quarter bounce

But the structure of the oil market has narrowed in recent weeks, making it less attractive to hold stocks in floating storage. Broker ICAP Shipping estimated on Friday only one VLCC was storing crude oil.

"The concern is that rates may not rebound to meaningful levels with the order book being so healthy," said Mike Reardon, vice president of research and marketing with Imarex.

Some analysts say the phase out of single hull tankers is unlikely to help much in the next year due to fleet expansion.

"Net fleet growth might still be about 5 percent for the next 12 months," Reardon said. "We need Q4 to bring strong demand."

Shippers say activity traditionally picks up in the fourth quarter helped by possible disruptions from fog, hurricanes, rougher shipping conditions in the North Atlantic and Northern Hemisphere fuel demand due to colder weather.

But some analysts argue it is likely to be a temporary boost given the supply pressures and subdued demand growth.

"The risks have increased, however, that such an upturn will be disappointing by historical standards," said Ole-Rikard Hammer, senior oil and tanker analyst with Pareto Securities.

"We see an over-supplied oil market and certainly land inventories are very high in most consuming countries that is normally acting against a big upturn in rates."

Pareto estimated average VLCC earnings at $50,000 a day for end 2010, falling to $35,000 a day next year.

Arctic Securities analyst Erik Nikolai Stavseth estimated average VLCC earnings at $40,000 a day next year versus $43,000 a day this year and $36,000 a day in 2012. Average earnings were $10,259 on Friday compared with over $180,000 a day before economic turmoil in 2008.

"We see them pressured as fleet growth is going to kill demand growth, at least given the current outlook," he said. – Reuters