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Tanker Market: The Oil Price – To – Freight Demand Correlation

There’s always a reason behind any sudden surge in tanker market rates and this time around is no different, especially if ones takes note of the days which led to last week’s spike. In a recent weekly report, Allied Shipbroking said that oil traders have been busy of late, “as the price of oil continues its climb amidst a series of concerns regarding supply constraints. The week had already started on a bullish footing, with oil prices hovering around the US$ 80 per barrel mark as many in the market braced for further potential disruptions that could be brought about by Hurricane Florence. Being already in a state of readiness, Trump’s UN speech was set to liven up the speculative flames as he took an aggressive tone on OPEC and what he sees as a continued effort in pushing up oil prices”.

George Lazaridis, Head of Research & Valuations, with Allied Shipbroking said that “this coupled with the bringing back of US sanctions against Iran’s oil sector (set to kick in around November) was more than enough to drive up concerns and bring back speculators by the masses. Given that it was only recently that OPEC and Russia decided against raising output beyond what they had agreed on back in June, many have already been in anticipation of a supply crunch in the making. Adding to this the most recent report released by the US Energy Information Administration which showed one of the largest drops in US crude stockpiles which pushed their levels below their five-year average for this time of the year, it looks as though these concerns may well have a stable founding”.

According to Lazaridis, “all this was enough to shoot the price of Brent Crude to its highest level in four years, while in early trading hours today it had jumped to just above US$ 83 a barrel. West Texas Intermediate was quick to follow peaking at US$ 73.65 a barrel, its highest level since July. At the same time U.S. crude oil production may well be breaking one record after another, but we are already seeing signs that it is starting to plateau given that in the last quarter we witnessed the lowest level of new oil rig additions since 2017. With such bullish signs on the horizon, it looks as though there was plenty of motivation for many traders to book in volumes these past weeks, while given that most small and medium sized oi producers have been scaling back their forward contracts, many importers were filling up inventories and stockpiles before the price surge gained further momentum.

Allied’s analyst said that “all this seems to have ramped up demand in oil tankers during the past couple of weeks, helping boost freight rates across most major routes. At the same time this leaves for much concern as we may on the one hand have seen a temporary spike in enquiries, however if this upward price trend in crude oil continues for too long, it may well dampen demand and cause for a dramatic scale back which would leave the freight market in a worse off state than what we were witnessing during the same time frame last year”.

He added though that “there are however signs that things may well improve, with indications seen that many have already started to switch over to different suppliers as they look to circumvent the Iranian oil restrictions. These sorts of restrictions always cause an inevitable hike in tone-mile demand as most look to source their needs from further away destinations than they would be under normal conditions. At the same time given that Saudi Arabia’s state oil giant Saudi Aramco is set to bring new crude output capacity online in the fourth quarter of 2018 from its two fields in Khurais and Manifa, it has in effect increased its ability to boost its production figures by a further 550,000 bpd if there is demand and if it agrees to do so in the next OPEC members meeting. With ample extra capacity given that it utilizes only 10.5 million bpd from its total capacity of 12 million bpd, its commitment to offset a drop in Iranian production is realistic while also leaving ample excess capacity to further drive growth in global output levels”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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