A rule of thumb in the shipping industry is that high oil prices are bad for shipping earnings, and low oil prices are good for shipping earnings. With Brent crude prices at US$70/b now, the shipping industry’s rates and earnings are now starting to sputter again, after recovering barely 3 years ago in 2015.

To be fair, it is nowhere near the nadir that was 2013 when shippers were essentially ‘paying oil companies to transport their oil.’ With crude prices at US$120/b and the shipping fleet expanding dramatically after a building spree in 2009, daily shipping rates along many major routes plunged to near zero. The absolute record low along the Middle East-Japan route was –US$8,000/day in an industry where operating costs run at some US$10-12,000 a day. That improved after the oil slump, where consolidation among the global VLCC and tanker fleet saw daily rates jump to US$65,000 for the key Arab Gulf-East Asia routes.

Things are slowing down again. OPEC’s sustained attempt to eliminate the global crude glut by slashing production by 1.8mmb/d has reduced traffic along the crucial Asia route. Coupled with the supertanker market swinging back into growth – Clarksons Research expect the global fleet to grow by 4% in 2018 after 5.3% last year – this seems like déjà vu.

Daily earnings fell by more than half to US$17,500 on average last year, far below the anticipated rate of US$25,000. 2018 has started off on a worse note; some East of Suez fixtures have now been made at only US$5,000 a day, below cost level again. This has been mitigated by better returns elsewhere – in the Atlantic basin and the developing US Gulf-Asia route – but 2018 does not look good for shipping.

Adding to the vessel glut are tankers returning from use as seaside storage units, given that crude prices are currently in backwardisation. OPEC meets again in June, optimistic that it could end its supply freeze ‘if the market rebalances’. That’s good for OPEC, but for shippers, that would be a welcome miracle.

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