Oil on the rise once more
19/08/2016

Oil on the rise once more

There were some big news this week on the commodities front as crude oil broke above the US$ 50 per barrel, its highest level over the past two months. This in part may well be seen as not being much but it is a reflection of the accelerated efforts being brought about to freeze production output and to slowly bring back some sort of balance in the supply and demand. The first steps towards this were being made back in February where Saudi Arabia and Russia agreed to temporarily halt any further increases in their output. This alliance with the biggest exporter outside of OPEC gave some confidence as to what could be done to end the two-year glut in supply, though till date little has been reflected in the actual market. Now with next month’s OPEC meeting in Algeria, there is talk that further agreements could be reached and crude oil production levels could be leveled off.
All this however should not be taken in with too much haste. Many traders have been very skeptical with regards to what could actual be achieved in terms of curving off excess supply. It is no surprise therefore that it wasn’t long before crude oil prices started to ease off once more. The problem being generated right now has to do with excess supply coming in from Nigeria and more importantly Iran, while there has also been a trend of cheaper inventories seeping into the market and finding their way to refineries that are trying to churn out refined products at record volume in order to curb the effect from the decreasing margins they make.
Up until now this has been good news for the tanker market, with the cheaper supply driving renewed demand and allowing for a complete rejuvenation of the trade. Simultaneous it has also allowed for cheaper transportation costs via reduced bunker bills, something that has played a positive part not just on the tanker side but on the shipping industry as a whole. At the first the industry rejoiced at the turn the market had taken, however things have now reached a more difficult and tricky point. Demand seems to have peaked for many months now, with much of the excess imports being noted as early as last year going towards excessive inventories (something that always left the question of how much could stored inventories ultimately reach?) the case of rejuvenated demand was a bit over estimated. The truth of the matter is that oil has been facing significant obstacles towards exponential demand growth for many years now. Improvements in energy efficiency, alternative energy sources which are either cleaner or provide governments with more energy independence. This has inevitably lead to a much larger decrease in price for every excess barrel that enters the global output, and probably a lot more than most of the OPEC member countries had anticipated and hoped for. In turn it now seems to be slowly forcing their hand to reverse in part their decision to pump out an excess supply in order to secure greater market share. The side effects to this are likely going to be relatively sever if done to quickly. Too much curbing of supply could cause a sharp increase in the price of crude oil, which although would temporarily help boost the income of oil producers, but would also likely trigger a global recession given the state most of the major economies in the world are in. As such the fallout would not be only felt in the tanker market but to the shipping industry as a whole. A precarious position to be in, given all the talks of freezing output.

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