Oil price crash: where’s shipping steering?

Read about how the COVID19 pandemic induced the biggest oil price crash in history. And what is the impact on maritime shipping?

Economists are already referring to the global slump brought about by the coronavirus as the world’s worst-ever economic downturn – a “Greater Depression” that’s even worse than the Great Depression in 1929-32. With lockdowns, closed frontiers and stay-home restrictions reducing road, rail and air traffic to an absolute minimum and economic activity having slowed down to an almost standstill the world over, the global demand for oil has fallen through the floor. On April 20 the price of the May futures contract for West Texas Intermediate (WTI) plunged to never-experienced negative territory of minus $40. In other words, US oil producers actually had to pay people to buy or store their oil. Since that historic low, the price of WTI and Brent crude has recovered somewhat but still remains at levels not seen for decades. It’s a simple equation, basic supply-and-demand economics. With supply significantly outpacing demand in the global oil market, the price of “black gold” has slumped.

The storage problem

With the demand for oil having fallen faster and further than at any time in history – by as much as 30% or 30 million barrels a day this year – storage facilities have filled up worldwide. Conventional oil storage facilities are forecast to reach tank tops by June. Technically speaking, it’s extremely tricky to reduce the output of an oil well to accommodate falling demand. So cutting production levels to the current low demand levels is not an option. As storage tanks across the USA filled up fast, creative solutions had to be found. By April 20 a record 20 million barrels of oil were floating off the US West Coast. In waters from Long Beach to the San Francisco Bay well over 30 oil tankers, requisitioned as storage vessels, were carrying enough oil to satisfy 20% of the world’s daily consumption. The Fleetmon Explorer, a live-tracking tool, shows this concentration of anchoring tanker.

And it’s not just the coast of California that has been an Eldorado for tanker spotters. The busy Singapore Straits, a narrow waterway at the best of times, is full of oil-laden tankers anchoring offshore. With domestic demand crashing and stockpiles swelling in refinery-rich South Korea and China, tankers filled with refined oil products such as gasoline and jet fuel have lined up in the waters off Singapore.

Tankers in demand

Not surprisingly, the oil glut and desperate search for storage tanks have seen clean and dirty freight rates soar dramatically, e.g. to a more than 15-year high in the demand for clean floating storage. A growing number of the world’s supertankers are taking on oil at premium rates said to be as much as eight times higher than their average daily break-even costs. Ashok Sharma, managing director of the shipbrokers BRS Baxi Singapore, told Asia Times that the average daily freight rates for very large crude carriers (VLCCs) reached $160,000-170,000 a day towards the end of April. 12 months earlier, they were around $10,000 a day. With 10-15% of the world’s fleet of 815 VLCCs now booked to store crude oil and each vessel holding some 2 million barrels, an estimated 160 million to 200 million barrels are currently being stored at sea. The overall “oil on water” volume – the total amount of oil currently being carried on tankers at sea – is estimated to be some 1.2 billion barrels. With these vessels in such great demand and rates ballooning, “we are one of the few industries making money in this period,” says Hugo de Stoop, CEO of Euronav, one of the world’s largest tanker companies. He describes the current market as “totally and completely unusual”, but he certainly isn’t complaining.

Slow steaming

One simple strategy to ease the storage dilemma is to order tankers to sail more slowly than usual, a practice known as slow steaming. Oil tankers are generally contracted to sail at 13 knots but fully laden VLCCs sailing 2 knots slower are no longer the exception to the rule. “Oil on water” eases the storage conundrum and also brings significant cost savings by reducing fuel consumption. According to Greenpeace Magazine, Germanischer Lloyd has calculated that a containership sailing the Hamburg-Shanghai route at 18 instead of 26 knots would reduce its fuel consumption by around 40% from 6,210 to 3,700 tonnes. Moreover, slow steaming also brings environmental benefits, as slower speeds bring significant reductions in emissions of carbon dioxide, sulphur oxide, and nitrogen oxide. The environmental side effects of the Covid-19 pandemic are largely beneficial.

Winners and losers

Any extreme situation, such as the current corona crisis, throws up winners and losers. Whereas storage capacity owners, tanker operators, and charterers are profiting from the oil price crash and global glut of “black gold”, there are also plenty of losers. None of the world’s oil-producing nations can produce oil at a profit when crude costs $10-20 a barrel. Although Saudi Arabia needs a crude price of $84 a barrel to break even, it has vast financial resources and merely has to rein back its investments in other industries where it has been attempting to diversify off oil. Russia’s break-even price is more like $40 a barrel but with the corona crisis hitting the Russian economy particularly hard and President Putin having sent everybody home at the beginning of April, even Russia’s vast financial reserves will be sorely tested. Heavily indebted shale producers in the United States are likely to go out of business, but it is the smaller and poorer oil-producing nations such as Venezuela, Ecuador, Nigeria, or Iraq that will be most badly hit by rock-bottom crude prices. The biggest losers will also include refineries and distributors of refined oil products as the lockdown drives cars off the road and grounds planes the world over, and particularly in the world’s two most populous countries, China and India, and the largest oil consumer, the United States.

A complex picture

And what about shipping? With the exception of tanker shipping, the maritime sector has been badly hit by the economic slump as both industries and consumers worldwide buy less and global trade declines. But even for tanker shipping, the picture isn’t entirely rosy. The surge in demand for tanker capacity may well result in older vessels taking to sea. Moreover, the increased number of VLCCs sitting off the coast of California, Singapore, or other centres of population is leading to higher levels of air pollution. After all, there’s no shoreside power supply a few sea miles out to sea. But like so many aspects of the corona crisis, it’s still too early to predict what the medium- to long-term effects on shipping will be. As ocean freight volumes are intrinsically linked to the economies of trading countries, only a marked economic upturn from the corona-induced slump will enable the maritime sector as a whole to recover. But the world’s oil tanker community may well be hoping the good times continue for that bit longer.

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