Oil price war adds to tanker market volatility
Russia and Saudi Arabia begin a race to the bottom for oil market share as crude oil demand contracts for the first time in a decade
Oil prices have slumped 35% following the failure of Opec+ talks to rein in production, with Russia and Saudi Arabia locking horns. This has sent shockwaves through global markets already reeling from dwindling demand due to warm winter conditions and the coronavirus contagion
TANKER charterers and owners are stepping back this morning as Russia and Saudi Arabia begin a global battle for oil market share just as demand for crude is forecast to contract for the first time in a decade.
Brent crude tumbled by as much as 35% in trading over the weekend after oil cartel the Organisation of the Petroleum Exporting Countries’ three-year alliance with the world’s second-largest producer, Russia, collapsed on Friday. Brent was priced at $35.48 per barrel on London’s ICE Futures Europe exchange by 1130 hrs GMT, rising from as low as $31 per barrel in earlier Asian trading.
Chinese refineries slashed runs by as much as 3.5m barrels per day in February, resold March cargoes and curbed April buying as a coronavirus-led collapse in demand for air and land transportation fuels left the world’s biggest importer with a massive crude surplus.
Weekend reports suggest that 70% of Nigerian and Angolan crudes for April remain unsold, affecting suezmax tankers, which predominately lift cargoes from West Africa for shipment.
Suggestions that Saudi Arabia will lift production from levels of about 9m bpd to as much as 11m could see not only crude exports rise but temporarily lift shipments of refined products from the Kingdom as it expands runs. Saudi Arabia is a significant Middle East exporter of jet fuel, diesel and gasoil to Europe and Africa, and major local supplier in the Gulf.
Russia declined to agree production cuts of 1.5m bpd on Friday, thereby resisting Opec members who sought to arrest free-falling oil prices from the coronavirus outbreak. In retaliation, Saudi Arabia has discounted its crude prices and signalled higher exports to maintain market share. Russia’s leadership has signalled it will not cut output as it wants to head off the rise of US shale oil, which has added more than 3m bpd to global oil exports in the last three years.
Increased Saudi exports will likely boost the purchasing of Chinese oil companies who want to buy steeply discounted crude, providing employment for the very large crude tankers that typically ply these trades to Asia from the Middle East Gulf.
However, the oil price contango — when the spot price is lower than the future price — is not wide enough to support floating storage economics. The three-month spread for Brent crude was around $1.20 per barrel in trading today, with the three-month time charter rate for a very large crude carrier last done at $40,000 per day, according to shipbroker reports.
The demand shock lifted Chinese inventories to a record high in February. Any floating storage now emerging off West Africa and Singapore will more likely reflect a shortage of onshore storage than profitable crude contango structures.