Shipping and rising oil prices: US$90/barrel by 2020?

Rising oil prices and lower spot market rates dampen Q1 maritime margins
Vishnu Rajamanickam May 16, 2018

Shipping majors like Hyundai Merchant Marine, Yang Ming, and Hapag-Lloyd have released their Q1 earnings, reporting deficits in the quarter - as the maritime industry faces a steadily rising oil price and a spot market that had been weak for the initial few months of the year.

"We have had a solid start into the current year, but the market environment is challenging," said Hapag-Lloyd CEO Rolf Habben Jansen in a statement after the earnings release. “Freight rates have been under pressure, bunker costs and trucking cost in some important markets were up, and we faced a weaker U.S.-Dollar, whereas higher transport volumes and synergies supported the result.”

Hapag-Lloyd posted a net loss of $40.5 million in Q1, which is significantly lesser than its Q1 ‘17 net loss of $68.8 million. The reduction could be attributed to the company merging with United Arab Shipping Company (UASC) last year which incidentally, might render direct year on year comparisons moot.

The much anticipated Maersk Line earnings report is coming out tomorrow, and the forecast has not been much different for the container line, with investment bank Jefferies expecting Maersk’s net profit to hover just above the breakeven point.

The price of IFO 380 bunker fuel has been gaining ground from June of last year when it was $325 per metric ton to hitting $463 per metric ton this week. As the rise in price shows no signs of abating, the operational costs for the container lines should witness a constant increase.

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Morgan Stanley Says a Shipping Revolution Has Oil Headed for $90
Alex Longley May 16, 2018

Forget Iran and OPEC -- there’s another issue that will keep oil prices supported for the next two years, according to Morgan Stanley.

Brent crude will reach $90 a barrel by 2020 as new international shipping regulations take effect, overhauling the types of fuels produced by refiners, the bank’s analysts said in a report.

The changes, which force vessels to consume lower sulfur fuels beginning in January of that year, will lead to a boom in demand for middle distillate products including diesel and marine gasoil, triggering the need for more crude, they said.

“We foresee a scramble for middle distillates that will drive crack spreads higher and drag oil prices with it,” wrote Morgan Stanley analysts including Martijn Rats.

While crude has already received a boost due to supply cuts by the Organization of Petroleum Exporting Countries and geopolitical events including the U.S. decision to reimpose sanctions on Iran, the rule changes add to the impact. Global benchmark Brent, which neared $80 a barrel earlier this week, is trading at the highest levels since late 2014. Futures for the January 2020 contract are at about $66.60 a barrel.

The rules from the International Maritime Organization call for ships to reduce the maximum sulfur content of their fuels to 0.5 percent, from 3.5 percent in most regions currently, in an effort to curb air pollution that has been linked to respiratory diseases and acid rain. The changes are expected to create an oversupply of high-sulfur fuel oil while sparking demand for IMO-compliant products, putting pressure on the refining industry to produce more of the latter fuels.

Repsol SA, Reliance Industries Ltd., Valero Energy Corp. and Tupras Turkiye Petrol Rafinerileri AS are among those who stand to benefit most, according to Morgan Stanley.

“The refining systems of these companies are highly geared towards middle distillates” and minimal high-sulfur fuel oil output, which is “the most advantageous combination after 2019,” the bank said in a related report.

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