Summer "dog days"
29/07/2016

Summer "dog days"

Against what most hopefuls in the market held for this summer, it looks as though we are heading for “dog days” during the month of August this year as markets take on further losses on the back of a general supply glut in commodities and bearish signs on the side of demand. Oil continued its downward trend this past week as production levels continue to hamper on the market and prevent any further improvement. At the same time there has been a considerable softening in terms of cargoes opening up in most regions, driving down rates for crude oil carriers across most regions and trading routes. These are some of the lowest levels we have seen earnings fall to in over 22 months and it seems as though we are heading back to the “usual” market trends during the summer lull period.
Although rates are still holding up favourably compared to the “poorer” years of 2009-2014, we are now more certain that we are seeing an end to the extraordinary freight rates that were noted from the second half of 2014 and at the same time we are seeing a squeeze during the downsides of the annual seasonalities in the market, that as it seems could even reach averages rates of below US$ 10,000 per day for the large VLCCs. This all points to all that has been feared for some time now, with investors having been relatively cautious in their approach of this sector since the beginning of the second quarter of 2016.
Prices for secondhand tonnage in the crude oil size segments has dropped on average by around 24% since the beginning of the year, under the pressure of limited buying interest at these price levels and the dropped in both newbuilding prices and scrap values. It hasn’t helped that most buyers out there would be heavily dependent on investors from different private equity funds and other financial houses to finance part of these purchases, something that has the added drag that they view the energy sector with very limited appeal if any for some time now. Despite this and given the overall state of the shipping markets, tankers still fare relatively better than most other conventional sectors of shipping in terms of freight earnings. The dry bulk market has been in the dull drums for a very long time now, while most containerships seemed to be plagued by an ever changing market with excessive new ordering continuing on as line operators look to achieve ever lower per TEU shipping costs for their clients. The appeal though seems to be more towards dry bulkers then tankers at the moment, given that most of the available buyers out there right now are more interested in investing in distressed assets during the downturn of the market. This makes sense given the fact that the current state and prospects of the global economy leaves for little faith in a major economic boom being in the works that could imminently drive rates rapidly up and keep them there for the duration of a typical investment cycle of 5 years.
As such it seems as though we are at an end to the major benefits that can be achieved by the comparatively low crude oil prices and the market now is heading back to “normality”, finding a way to deal with the same poor fundamentals that it faced two years back though having been given a grace period (a 22 month period since the final quarter of 2014 in which it recovered some of the previous losses made) and still seeing much better freight levels then it did back then while it deals with the changing face and prospects of the global crude oil trade.

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