By Linos Kogevinas
Commercial Executive - Cotzias Intermodal Shipping
US Shale production continues to grow rapidly, hitting new records and with projections being revised upwardly at every turn. According to the International Energy Agency, the US will overtake Russia as the world’s #1 crude oil producer by next year, having surpassed 10m bpd in late 2017 and slated to surpass 11m bpd by the end of 2018.
Over the past two years US shale oil companies have managed to become more efficient, optimizing production processes and utilizing new technologies and practices at lower costs. This is attributed in part to technological breakthroughs on the drilling side; Break-even points for US production have been driven substantially downward. It remains to be seen if this increase will be sustainable but at this point most pundits do not see production peaking before 2020.
The booming production has of course unnerved other producers and oil markets globally and comes at a time when other producers have voluntarily capped their own production in order to prop up prices. During 2017, we witnessed the spike in prices due to OPEC production cuts with prices steadily correcting upwards since November 2016. Oil is currently trading in the low $60s, after peaking at a 3-year high of ~$66pb.
OPEC and its allied producers are seeing their market shares eroded by the increasing US production. At the same time, US oil imports are also dropping, further shrinking profits from OPEC established markets. With this in mind, it will be very interesting to see how the commodity price will fare under these new conditions.
US shale production will be extremely important to watch over the next 5 years. It is almost certain that production will continue to grow in the next years. However, a number of factors will determine if this growth will be sustainable long term and how the market will balance itself under a future -potentially different- status quo.
On the tanker side a growing US production is good news as exports from the country could be offering more and more support to rates in the future as apart from Europe and Latin America, the long haul trips to the Far East and particularly to China is gaining increasing momentum. Thomson Reuters data reveals that US shipments specifically to China that were non-existent prior to 2016 have now reached a new record of around 2.01 million metric tonnes or 474,450 barrels/day during last month. Sinopec, the biggest oil refiner in China, expects to import 10 million metric tonnes of crude oil from the US during 2018. As the production cap from OPEC and Russia continues, the fairly new and quickly increasing flow of the commodity from the US to S. Korea, Japan and China is definitely something to watch out for.
Additionally as a growing US production will almost certainly keep undermining OPECs efforts to boost oil prices, this means that the price of the commodity will keep moving – at least for the short to medium term- within a specific range that is still considered attractive for consuming countries maybe not compared to early 2016 levels but certainly when compared to mid-2014 levels of around $ 100/barrel.
Chartering (Wet: Soft - / Dry: Firm + )
The dry bulk market managed an impressive turnaround last week, with gains noted across the board and sentiment firming quickly. The BDI today (27/02/2018) closed at 1,188 points, down by 3 points compared to Monday’s levels (26/02/2018) and increased by 71 points when compared to previous Tuesday’s closing (20/02/2018). The crude carriers market seems unable to catch a break, with further losses noted last week and a particularly quiet VL middle East market signaling further losses ahead. The BDTI today (27/02/2018) closed at 658, increased by 17 points and the BCTI at 621, an increase of 8 points compared to previous Tuesday’s (20/02/2018) levels.
Sale & Purchase (Wet: Stable + / Dry: Soft -)
During the quietest week of the year so far in terms of dry bulk activity, containers sales stole the spotlight with help from the continuously growing MPC, while interest for tanker candidates also picked up. On the tanker side we had the sale of the “FRONT CIRCASSIA” (306,009dwt-blt ‘99, Japan), which was sold to Indian owner, Foresight, for a price in the region $18.5m. On the dry bulker side sector we had the sale of the “DA CHENG” (57,300dwt-blt ‘10, China), which was sold to Chinese owner, Shanghai Changhang, for a price in the region of $13.3m.
Newbuilding (Wet: Stable + / Dry: Stable +)
Not much has changed on the newbuilding front where orders keep coming in plenty on a weekly basis. Following the VL orders of the week prior the tanker sector has seen further activity with a quarter of methanol carriers being ordered in Hyundai against time charter to Waterfront Shipping , while the Capesize option declared by the JV between Cargill and Mitsui is most probably stealing the spotlight. It’s been quite a while since we last saw a Capesize order indeed, while on the other hand we have seen plenty of VLOC orders instead, which is not particularly positive for the bigger bulkers altogether that have been battling with oversupply throughout the greater part of the past years and have only during the past months started enjoying a healthier market. In terms of recently reported deals, Japanese owner, NYK Line, placed an order for one firm MR tanker (50,000 dwt) at Hyundai Mipo, in S. Korea for a price in the region of $44.0m and delivery set in 2019 - 2020.
Demolition (Wet: Stable + / Dry: Stable +)
There is definitely a lot to take in from simply looking at the list of the most recent demolition sales below. As far as the demolition market is concerned, it is evident that prices are steady with no signs of weakening for now, while as rumors for the re-opening of the market in Pakistan for tankers keep on coming, this is expected to keep offering further support to price levels in the short term. What is probably more interesting though in regards to the activity below has less to do with the demolition market and more with the tanker sector. The fact that in just a few days about 1.2 million dwt has been sold for demo is definitely reflective of the disappointing returns in the sector, but it is also an indication of what we should be expecting in regards to this year’s tanker scrapping activity that appears set to remain firm at least for as long as weak earnings keep coinciding with attractive demolition prices. Average prices this week for tankers were at around $230-460/ldt and dry bulk units received about $220-450/ldt.
Please find Intermodal's Market Report for the week 8,2018 here