Crude oil carriers: Bulls or Bears?

Crude oil carriers: Bulls or Bears?

Approaching on yet another Posidonia exhibition week and one involved in the industry seeks to take into what there is to be celebrating about this time around. Market sentiment has shifted considerably and is unlike any other noted during previous exhibitions that have taken part since 2002. The dry bulk market has hard landed since 2014 as the deflating commodities bubble continues to unwind, while the rest of the main sectors in the industry have to struggle in their own way, most dampened by the sluggish economic growth noted globally. 2016 has been particularly difficult, with earnings having dropped to dramatically low levels in sectors such as dry bulkers and containers, while in other, previously well performing sectors, such as gas carriers and tankers, a major downward correction has been noted over the past couple of months, while prospects for even these sectors have considerably diminished.

Over the course of the past year, the main market that has outperformed has been the tanker market and especially crude oil carriers, that have seen a remarkable recovery thanks to the dramatic drop in the price of the commodity since 2014 and the large scale stockpiling that has been undertaken by many since. Things however are slowly changing and not in a favourable direction. Stockpiles have reached close to their maximum capacities, while there has been little reasoning up till now to keep increasing capacities since, few now believe that prices will climb back up to the levels that they were hitting back in the summer of 2014. At the same time actual consumer demand for crude oil and its products is not being driven anymore by ever lower prices and is now once again facing the same issues with regards to the market fundamentals that it was 2 years back and as such is not showing favourable prospects for the near-term or long-term.

Things have now reached an even more difficult point as the price of crude oil recently managed to edge just above the psychological level of US$ 50 per barrel, a level last reached 9 months ago. Although this held only for a day, sentiment across the whole oil industry changed dramatically with many speculators which had previously shorted the commodity, reduced their bets on falling prices to the lowest level in 11 months. Many see these as a sign that supplies are coming into balance, despite the fact that the recent rise has mainly been driven by lower U.S. production levels and unplanned disruptions in supply in Canada and Nigeria. The main factor that has changed sentiment as such has mainly been the slow change in stance amongst OPEC members and the considerable increase in net debts over the past year, that are currently held by some of the largest Western oi companies.

With such changes in the market, many are now seeing as a more worrisome sign the current orderbook level for some of the larger crude oil carriers that currently range between 17 and 25% while averaging for the whole crude oil fleet at around 19.6%. The good news is that there has been limited ordering over the past 6 months, while we don’t expect a drastic change to this over the next 6 months either despite the ever dropping price being quoted by shipbuilders. Nevertheless, market uncertainty continues to be an issue and this is best reflected in the lack in activity being noted in the secondhand market while asset prices have witnessed a considerable downward correction since the start of the year. For the moment things are still holding at favourable levels in terms of earnings though it remains to be seen how long they will be able to stay as positive as they are today.

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