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Shipping number of the week: Oil prices suddenly drop 24% – a boon to the oil tanker shipping industry?

Shipping number of the week: Oil prices suddenly drop 24% – a boon to the oil tanker shipping industry?

Earnings will go up as fuel costs go down. Will we also see an evaporation of slow steaming and higher freight rates as Saudi Arabia starts to produce oil at maximum capacity?

As BIMCO often highlights, the oil tanker shipping market is at the mercy of geopolitics. This includes sanctions, elevated tensions in major oil producing regions of the world and the OPEC+ production alliance. The breakdown of the latter on Friday last week, wreaked havoc in the oil market and may significantly affect the oil tanker shipping industry.

As an instant response to the breakdown of the OPEC+ alliance, Saudi Arabia announced it will open all taps and produce 12.3m barrels of crude oil a day in April. This is above the official Saudi Aramco sustained production capacity of 12m a day. It is massive either way you look at it.

Would it result in additional exports of 2m barrels of oil a day out of Ras Tanura, the main export terminal in Saudi Arabia?

It certainly seems like it, as preparations for much higher exports went ahead on 10 March, including chartering of 10 Very Large Crude Carriers (VLCC). One VLCC can carry 2m barrels of oil. In the coming three weeks, we will closely watch out for any firm fixtures from Saudi Arabia, as it will give a clear indication of how much higher exports may go on the back of increased production.

On 11 March, Saudi Arabia has fixed at least 18 VLCCs on subjects as it pledged to pump more crude into the coronavirus-weakened market, as its price war with Russia escalates.

Any subjects must be lifted by contracting parties before a fixture becomes firm.

Cutting the sale price of oil by 24% and hiring VLCCs at freight rates up to USD 197,500 per day, clearly the financial logic behind this is dealt with some other day. Much larger issues are at stake here. Average VLCC freight rates stood at USD 33,709 per day on Friday 6 March.

Saudi Arabia sells … but who’s buying?

Cheap oil is always attractive, but with many commercial stocks still being bloated from the inventory builds of 2014-2016 – who has the capacity to buy? Can refiners see an opportunity to secure low priced feedstocks? Or will it all end up in Chinese Strategic Petroleum Reserves? Or perhaps go into US Strategic Petroleum Reserves?

Geopolitics is a power play that has affected tanker shipping massively in the past six months. If Saudi Arabia successfully finds overseas buyers for the additional 2m barrels of oil a day – even just for a month or two, crude oil tanker freight rates will rise sharply.
Source: BIMCO