Feature: Gone fishin’

You can tell it’s nearly summer because there is a hint of desperation in the air; that and the smell of gasoline. In the US, the 4 July holiday week-end heralded the start

of the summer driving season, when Americans take to recreational vehicles and get hundreds of miles under their belts without a second thought.
This is obviously good news for US crude oil demand as well as refiners and products suppliers. But the desperation comes quite quickly on any trip to the US East Coast. Outside the metropolis of New York City, unemployment is high and looking structural, economic growth flimsy to non-existent, the housing market dead in the water.
And although the surprise move two weeks ago by the International Energy Agency (IEA) to release up to 60m barrels of oil from its strategic reserves was branded a global measure, the view in the US is that the Obama administration pushed the initiative as a substitute for further Quantitative Easing.
With oil in the high ‘90s, the bet was to get the price down further and encourage Americans to get in their cars, go on holiday and put more money back in the local economy when they reached their destination. President Obama threw 30m barrels into the pot to ensure it.
And hey presto, prices dipped sharply. An additional supply of 2mb per day for 30 days from 23 June sourced from storage facilities in the US, Europe, Japan and South Korea was described by the IEA as an attempt to counter concerns that the high oil price would constrain global economic growth and derail recovery.
The IEA also has a slightly longer view in mind - though only to the end of this year - and thinks that the price could easily spike again if action is not taken. With the 8 June meeting of OPEC failing to make a concerted effort to raise output, the IEA is attempting to avoid further tightness in the oil markets leading up to the further demand increases expected for the third and fourth quarters of 2011.
The ICE Brent contract reached USD 126.65 at the beginning of April and the IEA has a weather eye on tight supply, with markets strained as a result of the Libyan civil war. The SPR release had some success - ICE Brent falling 6% from USD 114.21 the day before the announcement to USD 107.26 before recovering to comfortably around USD 111.5.
So much for the politics - what does this reduction in price and increase of supply mean for tanker markets? Analysts at Lorentzen & Stemoco signed off for the summer with a bullish interpretation.
The crude oil price reduction should be positive for bunker costs, L&S said, thus improving time charter equivalent earnings and giving some cash flow relief to shipowners.
“Also, looking a little further ahead, the oil price reduction will pass through to consumers of refined products, hopefully in time to support the US driving season which ends at the beginning of September. Longer term we support the IEA in that a lower oil price will heighten global economic growth prospects, which in turn will be positive for shipping markets.”
For the US, the short term shipping effect will be negative - keeping imports down by requiring 15 fewer VLCC loadings. On an annual basis a 1 mbpd decrease in US imports would reduce the Middle East Gulf VLCC demand by about 40 vessels, indicating what to expect leading into the third quarter, and potentially the impact of further stock releases, should they occur.
In Asia, the release will consist of primarily refined products, with Japan releasing 7.9m barrels into its own market and South Korea 3.5m barrels, most likely also as products according to its government. Thus, as it stands the near term impact must also be considered adverse for product tankers.
But L&S - in common with some other analysts and observers - makes the point that this is a temporary effect. Calling it a “short term blow”, it says reductions in reserves will eventually have to be replenished. And unless OPEC is then capable of increasing supplies the market could again face increased oil prices.
Unstable markets - and particularly high prices - are not good news for tanker owners, but in a rising prices and higher demand scenario more consuming nations will need to secure supplies. An increasing oil price contango - with the price for future delivery higher than nearby - should push both shipping and storage demand up.
That strength has not been observed as yet - though there is some evidence of enquiry for chartering VLCC tonnage for storage - and for the next couple of months owners will continue to engage in a desperate dance to maintain profitability.
Owners face a double whammy, which the SPR release only marginally addresses: the need to get spending on bunker prices under control and the desire to keep tonnage out of the market, so creating the illusion of tighter ship supply.
Owners who slow steam on ballast legs of course do so at their own cost, but attempts to get this written into charterparties for fronthaul laden legs is meeting stiff opposition from charterers which have plenty of choice of tonnage available and no wish to pay increased rates.
Dropping sailing speeds from 15 knots to 11 knots on the return ballast leg of an MEG-Asia round trip is already saving VLCC owners around USD 3,000 per day in bunker costs, according to research by McQuilling Services.
Further cost savings could be achieved if charterparties allowed them to slow steam on the laden leg, with the added benefit to market fundamentals that this would remove ships from the available tonnage list for longer and therefore could improve freight rates.
A recent McQuilling report calculated a USD 21,000 saving for the owner during a trip under these conditions but a consequent rise in additional inventory costs of USD 385,000 for charterers.
McQuilling puts the daily cost of keeping a 2m barrel VLCC cargo worth USD 200m at sea and unavailable for sale at USD 55,000 per day, if a 10% annual interest rate is applied, which over the course of an additional seven days of slow steaming would total an additional USD 385,000 for the charterer.
For slow steaming to no longer be necessary, at current bunker prices, spot rates would have to exceed W100, notes McQuilling. However, with the current oversupply of tonnage in the VLCC sector and rates at an average of W57, it does not expect rates to reach those levels anytime soon.
Perhaps the best thing is to go on holiday and forget about it for a month or so.
Source: Bimco