Global Economy’s Rebound Will Determine Shipping’s “Fate”
In its latest weekly report, shipbroker Allied Shipbroking said that “undoubtedly 2020 will be one of the most challenging and radically altering years for global markets. China’s economy has already experienced a major step back, with the 1st quarter clocking a slide of just below 7%, with both the poor activity being noted in fixed asset investing as well as the drop in retail sales definitely playing an important role. Even with a rebound in the economy generally being considered a certainty (to some degree at least), what is becoming more and more evident is that the Covid-19 pandemic has slowly been escalating from a short-term tail-risk shock to a long-term recession cycle”.
According to Allied, “despite the fact that in Europe we are already seeing some sort of easing of the extended quarantine measures, something that will hopefully be followed by a strong restart of the local economies, there are many concerns of a reescalation of the virus outbreak, something that may potentially have an even more harmful effect. The uncertainty is huge, with every given step forward hiding a risk of an even bigger step back. Beyond these however, things have been more so shaky in the tanker markets thanks to the recent developments noted in the crude oil market. Recent trends in the oil market have left many parties involved with mixed feelings. At the very start of the previous week, WTI future contracts with May expiration date collapsed to negative levels, a historic first for global markets which caught many by surprise”.
Allied’s Research Analyst, Thomas Chasapis said that “we must point that these negative price levels formed exclusively as part of the nature of these contracts in terms of their physical delivery options, with fears of stringer to no availability in storage capacities being available for these dates. In other words, we can see this more as an asymmetrical financial sell-off reaction, rather than an actual and representative pricing of the commodity itself. However, even so, the damage seen in oil demand as part of the pandemic is now more that obvious, with oil prices being under severe pressure for a while now”.
Chasapis added that “despite the ongoing efforts of OPEC+ to cut global oil production by around 10 million barrels/day (close to a quarter of their production) for the next couple of months, overall demand may well face a decrease of more than double this figure during the same time frame. How would all this translate over to the crude oil tanker market though? Usually a huge decrease in oil price tends to trigger an opportunistic attitude of excessive buying that can help seaborne trade. Despite softer demand, the opportunities that arise from storing low priced crude oil are high, with many choosing to use big tonnage vessels as storage units, on the speculation of relatively “quick” price recovery. This is what in part drove tanker freight rates to skyrocket at the beginning of the previous month, when OPEC and Russia “disagreed” in production targets, leading to a steep downward correction in oil price levels”.
“All this is good and well for driving high freight rates and bullish sentiment in the near-term, however it also leaves for more worrisome signs for the long-term. Given the current uncertainty, if economic disruptions extend further or turn for the worse, the oil price recovery may well never materialize. This automatically means that the window of opportunity for these strategies to succeed become ever smaller (even if freight costs account for a minute amount compared to the total cargo value itself). Moreover, even if these strategies find room to succeed, the net gains for shipping would still be temporary. In order to keep a robust freight market you need a sustainable demand growth, attuned to the available tonnage capacity, otherwise the tanker market turns sour in the medium to long-term”, Chasapis concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide