NEW YORK (TheStreet) -- Frontline (FRO) - Get Report shares felt some selling pressure Friday after the tanker company, once again, surpassed quarterly expectations.

Investors appear to have sold on that news, but a murky outlook for tankers also likely played a role in the selling. In afternoon trading Friday, Frontline shares were changing hands at $26.48, down 3%, on heavy volume. Earlier in the session, the stock fell almost as low as $26.

In its second-quarter earnings release, Frontline, the reliable dividend distributor founded by shipping impresario John Fredriksen, worried out loud that the growing supply of newly built ships could weigh on cargo rates and said that it "expects a materially lower result in the third quarter of 2010 than in the second quarter of 2010."

Before the opening bell Friday, Frontline posted a profit for the three months ended in June of $81.3 million, or $1.04 a share. Adjusting for a nonrecurring gain, the company's EPS came to 92 cents a share, blowing out of the water the consensus Wall Street estimate, which called for 67 cents a share. But, in one of those ancient Wall Street logical fallacies, long-time shipping investors know that the market

TST Recommends

expects

Frontline to exceed expectations.

Despite Frontline's beat, and despite its announcement of a 75-cent

dividend

, the summer of 2010 has been difficult for tanker-ship operators. Rates have fallen sharply, for the simple reason that too many ships are vying for too few petroleum cargoes. The imbalance has arisen from the supply side, since booking activity has in fact increased since the beginning of the year.

The reason behind the recent spike in supply has caused a buzz in maritime circles. For one thing, year-old cantango trades in oil are being unwound. Because the forward curve in oil futures has flattened, the trade has become less profitable. To execute a cantango, arbitrageurs need to store the oil they bought in ships anchored at sea. When they exit their positions, selling the oil, they release those ships onto the market. But since the cantango isn't as lucrative now, those traders won't re-up with fresh trades and therefore won't need to charter tankers.

Others have suggested that fewer vessels are making long-haul trips to carry crude between export and import countries that are geographically distant -- the so-called "ton-mile" trade. If that were the case, the number of ships on the market would increase.

"We knew months ago that supply was building, yet rates stayed high. You could say they defied gravity for a while," said Mike Reardon, vice president of research and marketing at Imarex, a clearinghouse of freight derivatives.

Where to go from here? Some shipping-stock pros say it would be wise to avoid shorting tanker equities now, no matter one's view on the global economy, bearish or bullish. With hurricane season upon us, for example, a storm in the Atlantic or Gulf of Mexico could send tanker rates spiking in a hurry. Furthermore, the fourth quarter is approaching, a seasonally strong period for crude transport, which could lead to improving rates and a rally in tanker stocks.

But going long isn't exactly for the faint of heart, either. Frontline's worrisome stance on new buildings certainly raises a less-than-optimistic semaphore. The bearish position says that fleet growth in 2011 of as little as 5% will cause serious problems for tanker operators if, at the same time, OPEC maintains production at current levels.

Tanker stocks as a group were mixed Friday afternoon.

Overseas Shipholding

(OSG) - Get Report

was trading at $32.49, down 0.7%.

General Maritime

(GMR)

and

Nordic American Tankers

(NAT) - Get Report

, meanwhile, we're in the green, advancing 2% each.

-- Written by Scott Eden in New York

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