Oil price shock
22/07/2016

Oil price shock

A shock was noted in the oil markets this week as the price of crude oil hit a near two month low. The increasing fears from the over swollen stockpiles that have amassed over the past one and half years and the boosted operations from U.S. producers with continued increases in drilling operations has made for a sour sentiment to hit global traders. At the same time many are now fearing the ease in demand levels that is expected to be seen over the next couple of weeks as refineries in the U.S. take on their seasonal maintenance schedules. This has also been widely reflected in the crude oil tanker freight rates over recent weeks, with inquiries keeping at a comparably low rate and leaving tonnage lists to amass in most of the main trading regions.
We are looking to be on the edge of another downturn in the price of crude oil as supply glut hits the market once more, though unlike the last supply glut which hit the market, dropped prices and boosted trade, things are now looking to be a bit more bleak. Demand is not in a state to drive further consumption even under the boost of price cuts. Several refined products are currently trading at fairly unfavourable terms, with margins for main products such as crude having been marginalised even in growth areas such as the Far East. This means that not only are we expecting to see a drop in refiners’ thirst for crude oil during the next one-two months, but we are also unable to see any further boost from further strategic stockpiling as we are already looking to be maxed out globally in this regard.
It doesn’t seem as though OPEC has made any significant cuts in production levels either, with June showing an increase of around 0.7% a day. Taking this in combination with further production increases expected to be noted out of Iran and Russian output now looking to climb considerably in the medium-term, it seems as though the supply glut will remain. As things stand now, it looks as though we will be seeing an average price of crude fairly below the expectations that many had set in the start of the year.
This last point is not necessarily something bad for those transporting crude around the world, as the lower prices should in theory keep demand levels buoyant. There is however a greater issue brewing under the surface, as the difficulties faced by refineries could likely lead to further hampering of demand and consumption in the short-term. Demand from consumers seems to have also reached a peak and it looks ever more difficult that we will see a considerable rise in demand for every dollar drop in price that is noted in the price of crude oil. This means that we have reached a barrier in demand levels that will be difficult to break through. The only way around this in the short-term will be for crude oil producers to cut back levels, but even in such a case this should do little to bolster transported volumes and will more likely go towards serving their earnings.
It seems as though we have started to face the underlining issues in terms of market fundamentals for the tanker market. As things stand now demand growth is pegged at a steady rate and it looks as though it is refusing to nudge to any higher rate. This has been something that has been wildly expected over the past years, as the energy efficiencies that have been achieved in the past are now hampering the elasticity of demand amongst consumers globally.

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