January 29, 2015

Double-edged sword

How quickly things change!


The oil bust last year has been a blessing to shipowners who have been struggling to survive ever since the global economy tanked six years ago. Bunker costs have halved, which means that, for example, even a medium sized container vessel’s fuel costs today are almost a million dollars lower than they were a year ago. Given that the industry has been struggling to control even nickel and dime costs, this is a life-saving number.


Another blessing has been bestowed upon owners of very large tankers, who have seen their ships back in demand as traders and speculators rush to store cheap fuel to be sold later at higher prices. China is stockpiling fuel; the contango market in oil- where forward prices are higher than existing ones- has meant a stampede towards large tankers. With things expected to stay copacetic for the next few months- or so experts would have us believe-this will continue.


But-and alas, there is always a but- there is a flip side to this. For one, the shale industry in the US is going from boom to bust in quick time. An industry that exploded in the last couple of years, generating hundreds of thousands of jobs in a country struggling to emerge from the ruins of the 2008 financial meltdown, is collapsing at the same speed. The steep oil price fall has oil companies preparing mass layoffs this year in the US, reminding people of the eighties when as many as two thirds of oil rigs in Texas shut down within two years.


Billionaire Ross Perot Jr says that the shale industry will contract by 30% and prices will go below the $40 mark. BHP Billiton has said that it was cutting US rig operations by 40% this year. Baker Hughes is cutting 7000 jobs and Schlumberger 9000. All these biggies in the business are slashing expenditure by a fifth or so.

Clearly, the oil bust is not good news for everybody. Any period of financial chaos has, in any case, much collateral or peripheral damage that is often realised later but is nonetheless threatening- sometimes even devastating. There will be many shale producing countries around the world that have invested heavily in recent years and now face uncertainty. Unlike the US, many poorer nations will be hobbled by the relatively sudden collapse.

Oil prices aside, things do not otherwise look too rosy for shipping, where issues like overcapacity and anticipated high environmental regulation costs continue to create massive headwinds. The industry has, however, a bigger and more immediate problem, which is slow global GDP growth. The International Monetary Fund has just released its January World Economic Outlook update lowering projected global economic growth figures. The decrease is less than half a percentage, but has already had a huge impact on sentiment. The IMP expects global GDP to grow to by 3.3% in 2015 and 3.7% in 2016, which is hardly better than the 3.3% figure for the last two years. The IMF figures indicate that higher than expected growth will come from the US. The biggest laggards will be Russia- hardly surprising, given the oil shock, China and Brazil.


This is, obviously, not great news for trade and shipping, which will have to take whatever comfort it can from low oil prices alone.


While preparing for the end of the oil bust, of course, if it believes, as I do, that market forces are only part of the reason of the oil price collapse. The other reason- a US-Saudi backroom deal to bring Russia to its knees, similar to what they did to the Soviet Union before it imploded- is one I have written about before. If I am right, then the situation can reverse quickly; a politically strategic decision, after all, can be easily reversed once objectives are seen to be met or if policy is changed for any other reason. For example, if the US feels that there is too much damage being done at home to the powerful oil industry by staying the course.


Like in much else in life, a double-edged sword awaits us here, too.


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