LONDON (Bloomberg) - Oil prices that generated record shipping fees for Frontline Ltd., and the rest of the tanker industry, may reduce corporate earnings as demand growth slows and a new armada enters the market.

Frontline, the world's biggest oil shipper, led the five-member Bloomberg Tanker Index to its best quarter in almost four years. Now the industry will contend with a 15 percent drop in rental rates in the second half, a Bloomberg survey of 13 analysts and brokers showed.

Earnings will weaken because of a fleet expansion that the International Energy Agency says will "massively" exceed growth in cargoes over the next two years. The increase in vessels will combine with the slowest growth in oil demand for six years as the global economy loses steam, driving tanker rates 65 percent lower by 2010, futures contracts show.

"Industries are having a tough time and consumption must go down," said Per Mansson, a managing director at shipbroker Nor Ocean Stockholm AB and an executive at Frontline until about a year after it was bought by Norwegian billionaire John Fredriksen in 1996. "We can't live in this protected environment in shipping forever."

Only seven of 17 analysts, or 41 percent, say investors should buy shares of Bermuda-based Frontline, according to data compiled by Bloomberg. The stock climbed six kroner, or 1.9 percent, to 328.5 kroner ($64.48) as of 9.41am in Oslo, taking its advance this year to 27 percent.

"We still see a very strong tanker market for the next one or two months, but then there are concerns down the road, over the next three to six months," said Billy Chiu, commercial director at BW Shipping Managers Pte in Singapore, a unit of the world's largest private owner of supertankers. Record oil is "the fundamental" threat to vessel demand, he said.

The tanker fleet's capacity will increase 18 percent to 432 million tons of oil by the end of 2010, according to London-based shipbroker Simpson, Spence & Young Ltd., whose data is used by the IEA for shipping analysis. Oil demand will expand 2.7 percent during that time to 89.2 million barrels a day, the Paris-based IEA said July 1.

Frontline expects less growth in capacity. Jens Martin Jensen, interim CEO, told investors May 22 that 120 so-called very large crude carriers will join the fleet, while about 100 single-hull ships are phased out because they don't meet new standards of environmental protection.

"We will actually see a rather undramatic fleet growth," he said.

Profits from supertankers, which are bigger than the Chrysler Building and haul about a fifth of the world's oil, will drop 15 percent to $100,000 a day in the second half, based on the median estimate from the 13 analysts and brokers. In 2010 rates will plunge to about $67,000 a day, according to data from Imarex ASA in Oslo, a freight-derivatives brokerage.

The number of ships competing for cargoes may also swell in the next two months because Iran, OPEC's second-largest oil producer, is freeing up supertankers that it's using to store crude in the Persian Gulf, Chiu said.

The National Iranian Tanker Co. cut the number of idling ships to 11 from 15 in the last two weeks, Bloomberg data show.

Use of vessels for storage helped tanker rates more than triple since April, delivering rental income of almost $196,000 a day for Frontline, Overseas Shipholding Group Inc. and Euronav NV, according to prices from London's Baltic Exchange and a formula from Oslo-based shipbroker RS Platou A/S.

There are 71 supertankers available for hire in the next 30 days, up from 63 a month ago, estimates broker Barry Rogliano Salles in Paris.

To be sure, the Organisation of Petroleum Exporting Countries is pumping more than ever before, bolstering demand for ships, Bloomberg estimates show.

"All the extra oil that comes out of the ground will go to Asia," said Andreas Vergottis, research director at Tufton Oceanic Ltd., the world's largest shipping hedge fund.

Tanker firms will still be earning more than in the last several years. The average cost of sending supertankers from the Persian Gulf to Japan was about $46,000 a day from 1998 to 2007, according to Drewry Shipping Consultants Ltd. Rates will average a record $107,000 a day in 2008, Bloomberg's survey shows.

The market will also be buoyed by more demand for double- hull tankers from Asia, spurred by the puncturing of the Hebei Spirit in December, the worst oil spill in South Korea's history.

Single-hull tankers will be banned globally from 2010. As many as 43, or almost 10 percent of the fleet, have been sent for conversion either into commodity carriers, oil-storage ships or double-hulled crude transporters since the start of 2007, according to Lloyd's Register-Fairplay.

Demand for tankers in Asia may weaken after China raised its fuel prices by a record 18 percent last month, said Mark Jenkins, an analyst at Simpson, Spence & Young.

In the US, the largest energy user, the almost doubling of jet-fuel costs in a year led to the failure of at least a dozen airlines in the past six months, grounding planes.

"We've moved into a completely different ball game as far as demand is concerned," said Martin Stopford, a London-based executive director at Clarkson plc., the world's biggest shipbroker. "There's enough evidence coming through to suggest we are going to see a stronger response to this particular hike than previous ones."