Higher Vessel Utilization a Given, After Suez Canal Blockade

Further disruptions and delays in the global supply chain are a given, after the closure of the Suez Canal since last Tuesday. For most ship owners though, this development is expected to further boost their bottom lines. In its latest weekly report, shipbroker Gibson said that “since Tuesday, the closure of the Suez Canal has dominated mainstream media headlines around the world. At first there was a general sense that the situation would be resolved in a matter of days but here we are on Friday with the vessel still lodged in place. It remains uncertain when it might be removed with the salvors warning it could take weeks. Spring tide over the coming days will offer the best chance of a refloat, but if this is not possible then salvors will have to look atlightering the vessel before the next spring tides in a few weeks’ time. Even when the blockage is removed, a backlog of vessels will need to be cleared, meaning delays will be with us for some time”.

According to Gibson, “oil prices have shown some volatility driven by the closure this week, but fundamentally the oil market is well supplied, and demand continues to suffer from Covid-19 related disruptions. Quite simply there is little short-term fear that the canal closure will see Europe, or the United States run out of oil. This is not to say that the disruption to shipments won’t cause headaches for regional refiners and traders. Whilst general inventory levels are still above average in the US and Europe, some individual refiners may be holding lower stocks, and may have to source crude from elsewhere if delays continue which could see prompt buying of short haul crudes, both from storage and from regional producers”.

The shipbroker added that “likewise, on the products side, middle distillate flows which transit the canal from East to West were already expected to come under pressure as European demand feels the impact of a third Covid-19 wave and inventory levels remain ample. However, naphtha and fuel oil flows heading from West to East might feel the impact more. Seasonally stronger fuel oil demand East of Suez and continued demand for naphtha from the petrochemical sector will impact these sectors more”.

Gibson added that “the biggest impact will be felt in terms of vessel supply/resupply and how trading patterns are disrupted. Delays coming through the canal simply mean that it will take longer for these vessels to come open for business once again. Those vessels which had already fixed but not loaded are now likely to miss their laycans, meaning charterers will have to seek replacement tonnage. Unless the blockage is moved swiftly, vessels will be forced to sail around the Cape, which will extend voyages by 10-15 days and lengthen tonne miles. In some cases, the supply impact could continue to be felt months down the line. As an example, an LR2 trading from the Mediterranean to Japan would normally be open in Fujairah in 55-60 days’ time. If that same vessel has to transit via the Cape, it would not be available for business in the Middle East until 65-70 days’ time. This example illustrates that depending on the duration of the delay, the route in question and typical trading patterns, position lists could feel the effects in a few months’ time, as much as they will right now. Ultimately longer voyages and increased delays will lead to higher vessel utilisation which is undoubtedly positive for freight rates”.

“However, the trading economics must also be considered. With the canal blocked, traders will have to re-evaluate their trading strategies. Crude and products which might have been exported from the Mediterranean and Black Sea to the East might stay closer to home if freight costs and crude price differentials incentivise more regional trade. Likewise, cargoes from the Middle East which typically head into Europe via the Canal may end up being sold to Asia, creating more regionalised trade. The economics between different vessel sizes could also come into effect with the improved economies of scale offered by VLCCs, Suezmaxes and larger product carriers lending greater support to these asset classes. In summary, there are so many variables to be accounted for, but in our opinion these developments are supportive for freight rates with the ripple effects having the potential to be felt for months to come”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide