Oil prices have cratered in the last two months, with benchmarks Brent Crude and WTI set for their sixth straight week of price decreases. While oil prices tend to fluctuate, in this case, there’s more to it than meets the eye.
With complex geopolitical moves threatening to destabilize the oil and natural gas markets, freight forwarders need to be aware of what’s happening in the crude oil world, and how the ocean freight industry could be impacted with every barrel exported.
Here’s a recap of what’s happening in global fuel trade, and what it means for the ocean freight industry so far.
Tariffs, sanctions, and oversupply
China’s 25% tariff on U.S. oil and natural gas has decreased the amount of oil exported to the Asian power. From August to October, China implemented a complete halt on U.S. oil imports. China is the second-largest importer of U.S. liquefied natural gas (LNG). While U.S. production is as strong as ever (especially with the recent uptick in shale oil production), exports have diversified to make up the difference from decreased Chinese demand.
Aside from tariff policies, late-year sanctions are starting to influence the oil markets. Earlier this month, the United States government enacted a ban on oil imports from Iran. The ban was part of new economic sanctions on Iran by the U.S. following its withdrawal from the 2015 Iran nuclear deal.
Iran produces the third-most oil of any country in the Organization of the Petroleum Exporting Countries (OPEC), at nearly four million barrels a day. But experts believe that number could drop by 250,000-350,000 barrels due to sanctions.
Along with the U.S.’s total ban on Iran-produced crude, allied nations have also scaled back their import volumes of Iranian oil (under the threat of sanctions), though the Trump administration granted eight countries six-month waivers to continue imports.
The six-month waiver protects oil prices from spiking. The waivers, given to some of Iran’s biggest customers like China, India, and Japan, keep Iranian oil exports from coming to a complete halt overnight. Experts say if that were to happen, oil prices would almost assuredly jump above $100 barrel.
Separate sanctions on Russia have hampered their oil production and reduced investment in Russian mining and tapping firms from non-domestic and non-Chinese funds.
Oversupply is also keeping prices from rising. Saudi Arabia, the largest oil producer of the OPEC nations, started the year with a proposed initiative to its OPEC partners to ramp up production, at least partly at the request of the U.S. As a result, they may have inadvertently oversupplied the global oil market, keeping costs from rising even in the event of shortages from sanctioned nations in the short term. It’s unclear if Saudi Arabia was aware that their calls for greater production would help limit a price hike caused by sanctions against OPEC allies.
Because of oversupply, and since U.S. import restrictions also affect the demands of allied nations from sanctioned countries, demand hasn’t outpaced supply and prices haven’t skyrocketed. While countries like Russia have tried to cut their own supply to keep prices steady (and just today, oil prices rose on the hopes that OPEC will cut supply), the potential shortage caused by sanctions hasn’t yet happened.
The ocean freight impact
Shippers and carriers who handle oil imports and exports are set to benefit the most in the short term from shifting political fuel policies. With exports from Iran already halved, and Chinese demand for U.S. fuel decreased, new trade lanes are emerging that connect oil partners that are importing and exporting higher volumes of crude than they have before. As Costas Paris of The Wall Street Journal pointed out, the seasonal demand for oil moving across new routes and new sailing schedules has increased rates for very large crude carriers (VLCCs).
Shippers handling other freight this holiday season will still see seasonal surcharges on their bookings, but lower fuel costs will keep rates down. For carriers, lower fuel costs will dramatically increase margins on every route sailed. And there’s no better time for dipping crude prices than the holiday season when liners are crossing the oceans non-stop to meet peak season demands.
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