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Crash, Bang, Recovery

It was never going to be easy recovering from the largest economic shock the world has ever encountered. After record drop in consumer spending, GDP, travel and so many other indicators, it is hard to quite fathom the scale of the disruption, or the mountain left the climb to bring things back to normal.

Debt relief, quantitative easing, employment support schemes and more are being used to support national economies, and from the initial data it looks as though this has been reasonably effective. Yet to bring us back from the brink of things like the 20.4% drop in UK GDP in April is going to cause some casualties along the way.

The recovery in oil has been a painful one. Not only has it been slow, it has also been uneven. OPEC seems to be coping fairly well with the situation, having extended its production cuts agreement which has supported prices, allowing them to further increase the price of physical cargoes. The United States, Venezuela and Libya, on the other hand, are really struggling with the political and economic circumstances they find themselves in.

China’s Shandong independent refineries imported a combined 13.85 million mt of crude in June, a record high volume and 7% more than the 12.95 million mt received in May. This demonstrates the quite incredible turnaround in activity in China. It had one of the strictest lockdowns and now is sucking up as much crude as it can get it hands on. It’s unlikely to continue at these levels but since China has been responsible for 50% of oil demand growth since 2007, it is definitely a good sign for prices.

This news has had a significant impact on the tanker market. On paper, VLCC routes such as TD3C are seeing a much-needed bounce back from the bottom, with Worldscale values slowly climbing back up from their lows of WS35 to break above the WS40 mark. This reflects the tonnage still being stuck waiting to discharge at port with no definite unloading date. This uncertainty in VLCC itineraries is helping to thin out the tonnage list, giving owners a boost in rates. This increased activity due to tightened vessel supply should help to sustain a further rise in rates and confidence in VLCC markets going forward.

For oil products it is somewhat of a different story where poor demand is leading to refinery cut backs. Refiners in South Korea, Thailand and Taiwan are all cutting production of the new 0.5% grade fuel oil. These refiners have been big exporters to Singapore but now look set to reduce production, in some cases by up to 50%, to focus on domestic markets. Refiner Hyundai Oilbank noted that it was producing under 200,000 mt/month, nowhere near its capacity of 300,000 mt/month. The industry will see a 69% decrease in profits this year compared to 2018, according to Bloomberg. This is significant news for the shipping market as refineries are key players in the global economy for crude and distilled products.

In the dry freight market things crashed, hit the floor, lounged around for a while and have arisen like a phoenix from the ashes. The market has been swinging wildly this week. The front end of the Cape market has been dropping off after its meteoric rise last week over the $30,000 mark. This is partly a natural correction after moving up over 1500% in the last five weeks. With Brazil back in the market it’s setting up things for an interest second half of the year.

Iron Ore has moved past the initial reaction stage of virus denial, to acceptance and flat lining for a few weeks, to now not caring anymore. The August contract was sitting around $95.50, but has pushed up to over $102. This has been driven by some positive news on equities and Trump-like rhetoric of getting behind China. Fundamentals look to have been softening, but other sentiment has ignored this totally and again the iron ore market has defied gravity in its long steam upwards.

So, having crashed at the start of the year with everything thrown in every direction (apart from iron ore of course), then scraped along the bottom we are now making attempts at recovery. There’s sure to be a wallop somewhere in the progression towards normality, as any recovery back from such a dramatic change is going to be fraught with problems.

But for many of the main markets we are no longer talking of the lowest rates in some record number of years, we are discussing how things are changing from middling towards a proper recovery. Vive la reprise!

Source: Freight Investor Services

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