Shipbrokers trading in the tanker market seem convinced that the recent correction in tanker freight rates will set the tone for the market moving forward.
As oil prices fall, which is considered a positive development for tanker owners and that the upcoming winter season in the Northern Hemisphere should boost demand, it seems that the latest shockwaves from China could force the market to stay at current levels.
According to the latest weekly report from shipbroker Intermodal, “following the collapse of the Chinese stock market, the devaluation of the country’s currency a week ago, even to those who were optimistic in regards to global growth, more reasons to believe that the state of the economy of the world’s 2nd biggest oil consumer is not as strong as originally thought and possibly reflective of other developed economies as well. The sharp fall of oil prices is also partly indicative of these fundamentals”.
According to Intermodal’s Tanker Chartering Broker, Mr. Stratos Tiniakos, “almost ten years ago oil was trading at US$46pbl when demand from China started pushing prices up, to a point that these reached almost US$ 160 pbl just before world economies went into recession. The oil supply glut is now pushing prices further down; with the less optimistic analysts believing that we could even see the 25 mark sooner rather than later. The fall in prices that we are now witnessing was first predicted back in the middle of 2013, as easing of the Iranian sanctions was being discussed, Libya was about to start production again in a post-Gaddafi era and increased US production through fracking was taking place. Many believe that the current collapse in prices is engineered by Saudi Arabia in an effort to knock out the US production as it is estimated that the cost of production of a fracking rig, including the financing cost, is about 70usd per barrel. So with oil prices in the region of 25-30usd it is very difficult for refineries in the US to compete and this is also evident in the fact that the number of fracking rigs dropped from 1608 in October 2014 to 747 in April 2015. So where do we stand now?”, asked Tiniakos.
The broker noted that “the first half of the year was brilliant for the tanker owners and nobody expected rates to remain as firm during the summer season as well, when seasonality always traditionally takes its toll on rates. The low oil prices environment supported dry cargo owners to achieve sustainable margins and tanker owners to gain more out of a very good market. The recent negative reversal though has been puzzling everyone. Despite the fact that a number of tanker owners believe that market will reverse course and start firming once again, it seems unlikely that year highs could be reached any time soon amidst the shock waves China keeps sending in the markets around the world”.
Intermodal’s analysis of the market noted that “in the next couple of months many refineries are going into their scheduled semi-annual maintenance and about 70 million tons of crude will have to be stored, either on ships or in shore tanks. As demand cannot match supply and global growth is very likely to further decelerate, the tanker market is expected to remain somewhere around current levels, with lower oil prices supporting owners through smaller operating costs, helping them to achieve sustainable margins. The need for storage is at the same time expected to increase demand for DWT for 1-2 months period charters. OPEC is the only entity that can save prices from further collapsing but there are currently no signs that the organization is heading towards this direction anytime soon, despite the fact that the consensus to start supporting prices is growing within its members. The next meeting scheduled in December is probably too far in the future to prevent a further significant drop even if it called for this much needed production cut. In the meantime, if world economies are set for further headwinds in the future, even cheaper oil doesn’t sound too bad”, the report concluded.
Source: Hellenic Shipping News Worldwide, September 2015