• ITVI.USA
    12,814.390
    -64.910
    -0.5%
  • OTRI.USA
    28.180
    -0.280
    -1%
  • OTVI.USA
    12,761.130
    -64.740
    -0.5%
  • TLT.USA
    3.290
    0.010
    0.3%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
  • ITVI.USA
    12,814.390
    -64.910
    -0.5%
  • OTRI.USA
    28.180
    -0.280
    -1%
  • OTVI.USA
    12,761.130
    -64.740
    -0.5%
  • TLT.USA
    3.290
    0.010
    0.3%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
American ShipperContainerMaritimeNewsShipping

What crude price collapse means to ocean shipping

It’s a black swan on top of a black swan. First, the coronavirus outbreak, and now, the collapse of the production-cut agreement of OPEC+ — the coalition of OPEC and other countries including Russia — after a dispute on how to handle coronavirus-induced demand destruction.

With Saudi Arabia ramping up from production from 9.7 million barrels per day (b/d) to as much as 12 million b/d and offering steep discounts on April cargoes, a full-on price war appears likely.

There are major implications for ocean shipping, varying widely by segment:

Container shipping

On a positive note, the decline in crude prices ultimately flows through to the price of marine fuel.

The IMO 2020 rule requires ships without exhaust-gas scrubbers to switch from 3.5% heavy fuel oil (HFO) to cleaner 0.5% sulfur fuel called very low sulfur fuel oil (VLSFO). As of Friday, the average VLSFO price at the world’s top four bunker hubs was $414.50 per ton, according to data from Ship & Bunker. A year prior, the price of HFO was $427.50.

Given that Brent crude was down by 24% on Monday, VLSFO is likely to fall even further, implying that container lines should actually experience a year-on-year decrease in bunker costs despite IMO 2020, at least temporarily.

But this plus in the cost column will be countered by a minus in the revenue column. The plunge in oil prices will have highly negative economic impacts on oil-producing countries, which would should limit container import demand. And while lower oil prices normally act as a stimulus for consumers, that is not the case if consumer behavior is constrained by virus fears.

Crude-tanker shipping

The most directly exposed segment to the OPEC+ blowup is crude-tanker shipping. The consensus is that the commodity price plunge will be positive for freight rates, although analysts diverge on the extent and duration of the upside.

Clarksons Platou Securities analyst Frode Mørkedal is particularly bullish. As crude pricing induces land-based and floating storage, he sees spot rates for VLCCs (very large crude carriers, which carry 2 million barrels of crude oil) rising from $45,000 per day currently to potentially up to $110,000 per day.

According to Michael Webber, head of Webber Research, “Tanker activity and rates are generally positively levered to production volumes, including overproduction, albeit less sustainably.” He said the OPEC+ dispute would put “additional supply into a market that’s already oversupplied,” and as a result, he expects “floating storage, both structural storage when inventories saturate, as well as contango-driven economic storage.”

Evercore ISI analyst Jon Chappell said that the tanker names “dodged a bullet” when the prior OPEC+ plan for an additional 1.5 million b/d cut was killed. He believes an oil price war and contango “bode very well” for the sector, but that “it’s hard to recommend catching a falling knife in tanker stocks until there’s more clarity on the [coronavirus] impact to oil demand.”

According to Stifel analyst Ben Nolan, “Initially, this [crude-price reduction] would be good for crude tankers, although only moderately. Growth in supply is one thing, but the real problem is a lack of demand. More barrels could lead to floating storage, but ultimately, if people aren’t using the oil, any improvement is temporary. Longer term, an oil war could be negative as it would certainly lead to less activity in places like the U.S., which would shrink ton-mile demand.”

The bearish view for crude tankers is that sustained lower crude pricing will wipe out U.S. shale production, reducing long-haul U.S.-to-Asia VLCC shipments and replacing them with shorter-haul Middle East-to-Asia shipments. Vessel demand is not measured in tons of cargo, it is measured in ton-miles — volume multiplied by distance.

This same point was raised by Mørkedal one week ago, when he wrote: “Bottom line is that even though OPEC cuts are likely negative on the margin [for tanker rates], the potential slowdown in U.S. crude output if prices were to collapse would have been much worse for tankers.” Those prices have indeed collapsed.

The early indications on Monday were that Wall Street investors believe falling crude prices are good for tankers. In the first half of the trading day, as the broader market crashed and system circuit breakers were triggered, sizeable share-price gains were being posted by crude-tanker owners Euronav (NYSE: EURN), Teekay Tankers (NYSE: TNK), Nordic American Tankers (NYSE: NAT), Frontline (NYSE: FRO), International Seaways (NYSE: INSW) and DHT (NYSE: DHT).

Other vessel categories

Product tankers — “Product tankers should be more well-protected [than crude tankers] as there should be some uplift in underlying consumption with lower prices,” said Nolan. “However, falling U.S. production would also be bad for the product-tanker market as the U.S. is the largest exporter of refined products.”

LNG shipping Spot rates for carriers of liquefied natural gas (LNG) have been in sharp decline and the fall of crude makes prospects even worse.

“Low prices are not good for LNG,” said Nolan. “Cheap crude reduces the motivation to switch to [natural] gas and also the appetite for spending capital by energy companies. Less drilling activity in the U.S. for oil would quickly shrink [natural] gas production, killing off what little interest there may be in signing LNG export contracts from the U.S. This is bad for infrastructure and for ships.”

According to Webber, if coronavirus “brought the near-term prospects for new [U.S. export] LNG business to a particularly slow crawl, we believe the OPEC+ blowup will bring it to a full stop, at least until the dust settles.”

LPG shipping Liquefied petroleum gas (LPG) carriers primarily transport propane and butane. “The LPG markets would be negatively impacted, as slowing U.S. growth would mean slower U.S. exports, shorter ton-miles, and also, the petchem arbitrage for using LPG versus naphtha would likely not be open,” said Nolan.

Dry bulk Unlike in tanker segments, the oil-price plummet has no effect on the cargo side for dry bulk shipping. However, as with the container sector, there is an effect on fuel prices. The consequence is different for dry bulk, which has no set schedules, than for container shipping, which does.

“For dry bulk, it is probably slightly negative as higher fuel prices motivate lower ship speeds, so a very low oil price could lead to faster ships and effectively more supply,” said Nolan. More FreightWaves/American Shipper articles by Greg Miller

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Greg Miller, Senior Editor

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.

6 Comments

  1. Avatar Noble1 suggests SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU'LL PROSPER ! IMHO says:

    USO(United Stated Oil Fund) formed a nice Head & Shoulders pattern since its 2016 low . It breached the neckline 2 weeks ago , retested it last week and closed below it with nice bearish strength . Then price collapsed today breaching the 2016 low with a nice gap down .

    The writing was on the wall . The coronavirus is being used as the scapegoat ,however, nothing could be further from the truth . Unless they adjust it , we should see USO drop in to the $2’s .

    Remember the BS they were spewing about crude prices when Saudi Arabia’s oil field was hit ,and about IMO 2020 ? ROTFLMAO !
    It was equivalent to bla, bla , bla bla bla , period !

    How’s the economy doing ? According to the talking heads , consumers are holding it up , ROTFLMAO !

    Lately the ignoramus talking heads were spewing that CONsumers were going to feel richer due to the half point rate cut , LOL ! Their portfolio just took a hell of a hit since January 2020 ! How rich do you think they feel now ?

    Be vigilant and don’t listen to the noise apart for entertainment purposes !

    Keep in mind , the trucking industry is an infant compared to Wall Street when it comes down to BS !

    In my humble opinion …………

    1. Avatar Noble1 suggests SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU'LL PROSPER ! IMHO says:

      Same pattern on WTI which would suggest sub $10 if it pans out . Same pattern on Brent as well obviously . I’ll let you attempt to calculate the potential low target on that one for yourselves .

      IMHO

  2. Avatar Noble1 suggests SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU'LL PROSPER ! IMHO says:

    This is a great time to quote Madonna since she s eloquently put it :

    Quote :

    “Everybody spread the word
    We’re gonna have a celebration
    All across the world
    In every nation

    It’s time for the good times
    Forget about the bad times, oh yeah
    One day to come together to release the pressure
    We need a holiday

    You can turn this world around
    And bring back all of those happy days
    Put your troubles down
    It’s time to celebrate

    End quote .

    YES INDEED IF YOU SMART TRUCKERS “UNITE” , “You can turn this world around
    And bring back all of those happy days
    Put your troubles down”
    Ooh yeah , ooh yeah , WAKE UP , UNITE & CELEBRATE !

    In my humble opinion ………..

  3. Avatar Will Someone do something about the constant SPAM from Noble!!!!! When did it become OK to use a name section as a place to advertise? This needs to stop. IMHO says:

    Someone please moderate these comments

    1. Avatar Noble1 suggests SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & PROSPER ! IMHO says:

      Why do you fear truck drivers uniting and cutting out the middleman ,middleman ? I can simply use the title as an ending part to each one of my comments as I’ll do in this comment . Would that satisfy your childish tantrum ?

      You’re the first clown that complains about my headline rather than on a comment , LOL ! You’re no truck driver that’s for sure (wink)

      The technical analysis that I provide on this site for free must really make you jealous and fearful to be complaining about truck drivers uniting to cut out the middlemen from picking their pockets , LOL !

      It’s NOT advertising ignoramus , it’s a “suggestion” !

      Note : SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU’LL PROSPER ! IMHO

  4. Avatar Noble1 suggests SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU'LL PROSPER ! IMHO says:

    Copy & pated my comment below from under another article on Freightwaves
    ….

    I repeat ! All this talk about pump prices wouldn’t have an effect on a trucker’s bottom line nor would the trucker care about pump prices if truckers UNITED and created an Alliance which had a trading division which trades the markets .

    The cost of fuel for a transportation trucking company should be zero + put them in the green on the commodity . So rather than a cost on fuel , they would be booking a profit on it .

    But hey now , we wouldn’t want truckers to know that now would we , LOL !

    If you eliminate the cost of fuel plus reverse the cost into a profit , what effect could you have on rates ? That’s one element that could be used to “conquer” and obtain market share over your competition while eliminating your competition . You use that diminished cost & increased profit to increase truck driver pay tremendously while slashing rates tremendously .

    In my humble opinion .

    Note: Noble1 “suggests” SMART truck drivers should UNITE & collectively cut out the middlemen from picking truck driver pockets ! UNITE , CONQUER , & YOU’LL PROSPER ! IMHO

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