The commercial shipping industry, like almost all other businesses, has been heavily bludgeoned and suffering the wrath of the unprecedented global covid-19 pandemic.
With supply chains bottlenecked, ensuing restrictions in foreign trade, lesser demands and a scenario of standstill in almost all sectors ranging from transportation, tourism to heavy productions, the shipping industry, is a big impediment, least to say.
With one exception: the oil tanker business, which has seen a colossal boom in the times of pandemic.
Two chains of events in tandem have chiefly catalysed this: The Saudi Arabia-Russia Oil War and the COVID-19 pandemic itself.
The interplay of the former and latter led to a phenomenon of ‘demand shock’: the supply and availability outrunning the consumption creating a redundantly liable surplus, reckoned as an economic crisis.
This year has seen an unprecedented dip in crude oil prices (a 30 year historic low) with prices dropping to negative in the month of April.
The huge setback in the oil and gas sector also played a pivotal role in the stock market crashes in the month of March, along with the coronavirus pandemic recession (Black Monday: 9th March; Black Thursday: 12th March).
Conversely, the global stock market malingering by a whopping 20-30% avenged the oil market by taking a continual toll on the balance sheets and shares of leading oil and gas giants, exacerbated by the virus outbreak again.
Giants like Chevron and ExxonMobil reported a dip of more than 15% in global sales. This compelled them and several of their competitors to make cuts up to 20%.
However, this turmoil changed the entire dynamics of the crude oil market and the oil tanker business dramatically in 2020. Let us discuss the backgrounds of how these two have been instrumental in bolstering this skyrocketing of the oil tanker trade.
The Covid-19 Pandemic And Its Effects
The outbreak of the coronavirus pandemic literally sapped the transportation and heavy industries of its vitality, the chief backbone of the oil, gas and energy sector due to an unprecedented plummet in demand all around the world.
With stringent lockdown orders, flights grounded, manufacturing sectors in a standstill and literally all forms of transportation at an abrupt halt, the demand for crude oil and a vast majority of natural petroleum gases experienced an all-time sharp dip.
Airlines claimed that the seat occupancy globally fell by more than 60% in the wake of the pandemic. China, which was the starting point of this pandemic and is a giant consumer of crude oil, further contributed to the deadlock following strict lockdown measures. As of end 2019, it imported 11 million barrels per day, about 10% of the net global distributions. But in the first quarter of 2020, its consumption dropped by about more than 25%.
Soon after, as the virus spread like wildfire all around the globe the demand slumped in a drastic way, with the industry worst affected by leading consumers like the United States, India, UK, Japan, Russia etc. In the wake of the virus, the prices were already on a plunging spree, dropping by over 50% from over $60 to less than $30 as per NASDAQ exchange valuations by mid of March.
By the end of April, the oil prices in the U.S as per West Texas Intermediate (WTI) became negative for delivery contracts in May (unprecedented low up to -40$ per barrel)! This implied that a buyer will literally be paid for purchasing crude oil, to be put in simplest of terms.
West Texas Intermediate (WTI) indicated a somewhat recovery from the debacle with the oil prices at $15 around July 2020, which was still an offset to the $60 plus pricing around January when the pandemic was still in a neophyte stage. Moreover, the demand still didn’t pick up as the world is still facing the wrath of the virus.
International Energy Agency (IEA) recorded a drop of 30 million barrel consumption per day all through the pandemic. The United States itself reported a demand shortage of 7-8 million barrels per day, the worst in recent times. Once again, this was not in conjunction to the production as oil-producing countries still did not bring down the production (better explained the Saudi Arabia-Russia Oil War in the next section) to considerable limits in wake of the crisis.
This created an acute embargo in Storage. So much so, that the price of crude oil witnessed a historic low, a development also fuelled by other various factors including the stock market crash, malingering GDPs, strained US-China relations, a gross economic recession and of course, the Saudi Arabia-Russia infamous Oil War. This catalysed the need for an excess storage requirement.
With land-based facilities soon saturated, on-sea storage became a highly sought after option. This augmented the demand for an alternate means of storage, oil tankers and floating facilities as the chief viable means of large-scale oil storage and disposal. Estimates reveal a humongous 1.2 billion barrels that were ‘floating’ on waters (oil tankers) during the first 3 months of the pandemic.
- Impact Of COVID-19 And The Intensifying Crew Change Crisis & ICS 2020 Annual Review
- Watch: Where Did All Empty Cruise Ships Go Amidst COVID-19 Pandemic?
The Saudi Arabia-Russia Oil War
This was another chief development in tandem with the global pandemic which further exacerbated the ‘demand shock’ and its consequential plummet in the prices.
Saudi Arabia is the leading member of the OPEC (Oil Production and Exporting Countries) which comprise the lion’s share in the distribution of crude oil to the global markets (around 50%). This is association with newer members like Russia formed the OPEC+ which aggrandized their dominance in production and supply of their deliverables.
However, in wake of the coronavirus pandemic crisis that eclipsed the globe, Saudi and the older members of OPEC, after several rounds of speculation and cogitation, decided to cut down on the net production, initially on an average of 1.5 million barrels per day, as the whittling global demand in an offset to the humongous production could garner negative profits, that is implacable losses.
However, Russia, who had already had a taste of the gold is actively being part of the oil trading cartel over the recent years, refused to cut down on their production. This difference led them to be at loggerheads with Saudi Arabia and other supporting members of OPEC, which was obdurate in its stead.
The unexpected development paved way for the infamous Saudi-Russia oil war, which further had its toll on the slumping oil stock prices with global oil prices suffering a breach of 10% right at the very beginning. Russia moved out of OPEC+ and continued its production without any slack and in an unhealthy ‘market warfare’, all other members of OPEC including Saudi did not bring down the production and leverage over the oil market, drastically aggravating the ‘demand shock’ (Saudi officially declared that it would increase the production of oil from 9.7 million barrels to 12.3 million barrels), which was already being snowballed due to an ensuing pandemic.
This Oil War also played a crucial role in the global stock market crashes globally, which was already facing the brunt of the ramifying pandemic, thus bringing the situation from frying pan to fire. Since the onset of the pandemic in the first quarter of 2020, oil prices had already slumped as much as almost 30% globally.
In the weeks that followed Brent Oil Pricing Index of European countries fell as much as 24% and globally it was around 26% with U.S oil prices falling by as much as 35%, a precursor to the historic negative oil pricing as per WTI during the end of April and May Beginning.
As of 9th April, the Oil War between Saudi and Russia ended, thanks to US interventions and the accelerating uncertainty encompassing the pandemic, and as of that date and again in June 2020, both countries reached a consensus of cutting down production by 10 million barrels per day. However, due to ensuing lockdowns and the still below-average demands with market models forecasting a gross downtime in the oil distribution segment because of the profundity of the pandemic, the glut is nowhere close to market stability.
The Result On Storage
The production was an excess/surplus of 20-35 million barrels per day towards with a global demand of 65-70 million barrels/days, a stark contrast from end-2019 or early-2020 figure of 100 million barrels/day.
Discovery of lucrative shale oil reserves in the U.S, which can bolster the oil supply by at least 2-4 million barrels added to the queue. Refiners all around the world have already reduced 25-30% of their processes.
Even the indispensable LPG/LNG demand has seen a drop of 5-10%. With the pandemic clobbering the demand for almost the entire of 2020, more than 30 countries in the worst of its ambit, there was and is an ensuing glut of crude oil, where the lifting of lockdowns around the globe and the cut in production by leading oil producers did not bring dramatic relief to this scenario. A glut of at least 15 million barrels per day for the entire of this year and early next year is forecasted to ensue as the pandemic is still far from over.
Now the main concern arises: what happens to the oil reserves? Who are the winners and losers?
2020 saw the current and near-future oil markets enter a state of ‘Contango’: A situation when the sale prices are at risk of being lower than the stipulated, normal, contracted or expected.
Often the crude oil or refined oil ‘spot’ pricing is for a future date is decided on a process named Freight Forwarder Rate under normal circumstances. They may vary due to market fluctuations but an informed trader or a seller is well educated about the limits of these spot prices and often take these risk-based assessments into consideration.
However, in the current unprecedented scenario, even the slightest of these risks may engender catastrophic losses as the pandemic-stricken market of 2020 is highly volatile and pessimistically on a downswing, especially in the oil and gas sector. Thus, even the most informed market forecast models are at wits’ end to predict a price even in the near future as the oil glut continues and the pandemic still cavernous in its impact.
So, investors, sellers, traders and financiers have adopted the strategy of ‘holding back’ these natural reserves lucratively bought from the producers or exporters at low prices for the time being until the plight is over and the volatile market in under some grip.
This is where the oil tanker industry comes in. With land-based facilities saturated at above 85% globally, storage of large-scale reserves on tankers at sea becomes the next viable option. As already alluded once above, around 1.2 billion barrels of crude oil was ‘floating’ in water in the first 3 months of the pandemic. Even after the Oil War, Saudi entered into a spree of hiring 24 VLCCs (Very Large Crude Carriers) to temporarily hold the oversupply! Even after ending their tiff with Russia, Saudi is still offloading around 10 million barrels a day to clear the glut!
The oil tanker market saw a boom of 70%, whilst the other shipping industries were clobbered drastically by the pandemic. With traders withholding massive levels of reserves for a future profitable course, a large proportion of the current fleet has been converted into floating storage facilities.
The number itself was 15% during the first quarter of 2020 and is bolstering dramatically ever since. Though with the lockdown restrictions clearing in several places and nations adapting to the ‘new normal’, several traders are still waiting to see the market gain its pace before disposing their reserves to potential buyers and importers.
So, as expected, this has been the harvest season for oil chartering companies. Chartering rates have ballooned up to $200000 a day as compared to the average rates of 25000-30000$! Almost none of the vessels have been idle and nearly 2000 smaller vessels are also being deployed globally as larger vessels reach capacity limits.
This prolonged period is still a long way to go (even after the pandemic gradually wanes, according to experts) and the oil tanker industry is making use of this scenario, inflating in unprecedented limits.
The Way Ahead
Oil Tanker industry has always been on the positive spectrum of shipping. This pandemic has seen it snowball from strength to strength with still a considerable amount of time to go. The charter rates still continue to remain at a higher bar as offloading activities still continue and oil reserves still continue to be bunkered on ships. And even after the pandemic is over, in the very near-future as nations worldwide see a dip in the number of cases, the expedient recuperation of economies will call for a higher demand of natural resources including oil.
With several nations already set for a fast-forward restart and replenishment of the economy in an exigent pace, it can also be worthwhile to predict that there will be a booming spike in the demand of oil and gas resources, partly to cater for the seamless functioning of the economy and partly to equip the market dearth of the last several months morph in a superfast revival. In that scenario, the demand for crude oil supply to nations worldwide will see a rapid acceleration.
With the net profits it had garnered over the past several months because of the dramatic glut, the oil tanker industry must capitalize on the assets and exploit their business models in a holistic far-sighted manner. The utilization of an increasing number of vessels for storage and bunkering during the pandemic has also paved a prospective way for smart market strategies in the future where an idle vessel without a voyage can be used for preservation of reserves.
Chartering companies can tap on that. Moreover, with the ostensibly erratic nature of the oil price dynamics and market, the supply chain of crude resources is a highly unpredictable and volatile purview. Thus, the business of oil tankers can often be a roller coaster ride with balance sheets seeing both terrific rise and fall of profit shares. Hence, the gambit of oil tanker industries in the post-Covid world is to carefully assess feasibility and market shape at every juncture before making a step.
For instance, when there is a glut, as there has been, the company must capitalize onto its chartering prices as they have done with the sole aim of garnering benefits even if it is for storage or offloading. Geo-economics also plays a crucial role in this step and companies need to strategize on the target points where profits can be maximized. For example, after the onset of the pandemic-influenced glut, Fujairah in UAE and California in the United States became hotspots for idling off humongous quantities of oil.
Again, when there is a boom in the trading chain, operations and pricings should be optimized in regions of higher demand with larger chartering rates. With increasing demand and dynamics of the market, the oil tanker shipbuilding industry also has a bright spot. When in both positive and negative scenarios of accelerated demand and gluts respectively, there is always a win-win scenario if the business is properly strategized.
In the pandemic, there was an approaching paucity in the number of tankers for oil storage and even distribution (when the markets started opening). The number of vessels on the shipping map need to be escalated in order to cater to the increasing demand. Thus, in the current scenario, along with defence vessels and containers (which too has faced a blow due to the pandemic and diplomatic strains amongst several nations like China and the US or India), oil tanker too occupies a promising place in the shipbuilding sector.
Over to you. Leave your comments about this article below…….
Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.
The article or images cannot be reproduced, copied, shared or used in any form without the permission of the author and Marine Insight.