Oil Dilemmas – Don’t Blame the Tanker Guys

The shipping folks are the good guys, contrary to continuing representations on the political stage. But will they be lambasted if and when the tanker market swings around to the upside (see below)?

An Op-Ed in the New York Times by Steven Rattner (an investment guy who moves seamlessly among government, media and finance) chided the Biden administration for blaming the Supply Chain for inflation. Inflation has now moved to levels not seen since the early 1980’s, though interestingly, interest rates have not followed gasoline prices upward. After discussing “…too much money chasing too few goods…”, the maritime angle does enter his piece, when he says: “In this environment, shipping delays are hardly surprising. The Commerce Department reported last week that imports into the United States surged by almost 21 percent last year. No wonder that the volume of goods arriving at the port of Los Angeles hit record levels in 2021 — as did delays in unloading all the additional ships.”

Maritime voices have fended off the sharpest critics on domestic supply chains- with the correct view that container ships at anchor are a symptom- and not a cause. The queues at Los Angeles- Long Beach have reduced. However, the international oil side is likely to garner more attention. Like everyone else, I watch the news to figure out the next moves in the Russia/ Ukraine imbroglio. Probably like many of the readers here, I am always thinking about the implications on whatever (and this is a BIG whatever) for international shipping. If there is a disruption, it would almost certainly be on the tanker side. The LNG fleet seems stubbornly set in its patterns of feeding Asian markets (why not- with the great price spreads?), but major chaos- if the bullets start flying, could bring about some diversions to Europe.

The oil side, is also of interest to shipping participants from dry and containers (we don’t have OBO’s anymore, but even dry guys need to fill up their vehicles with expensive petrol). Rystad, a prominent energy analyst, asks in a recent e-mail: “Are we facing the start of a major supply crunch in the upstream world of oil like for natural gas? As global demand recovers from the pandemic, could we be near exhaustion of short-term production capacity, which means that the drop in revenues during the pandemic has caused capex (upstream investments) to fall below the balancing point of sustaining production capacity?”

Oil prices are no longer in that $50/bbl – $75/bbl “Goldilocks” zone. Rystad mentions that producers are still short something like 5 – 6 million barrels/ day of production- which not so coincidentally matches the much vaunted “spare capacity” estimates. If that production does start to come back (Rystad is noncommittal on this- but, to my mind, that $90+/bbl oil ought to coax some of those barrels out of the ground), that will be a lot of tanker demand. U.S. exports, which might come from shale producers turning their switches to the “on” position, could play an important role here.

Forgetting for a brief second about the disruptions if the shooting starts (diversions of vessels to more distant sources if the Eastern Med output is stymied), oil prices won’t come down instantly as production ramps up. It will take some time-check out the U.S. recent draw on its SPR and all the good that it did. I am certainly not holding my breath. However- if the Ukraine situation devolves into shooting, then look out above.  Indeed, President Biden has already put U.S. consumers on notice that trips to the pump might become even more expensive than they are now. 

Tankers may be diverted, stretching the fleet supply and pulling the market back up. War- or not, if something happens driving prices to the upside, my fervent hope is that the politicians and other pundits will not be wagging their fingers at our tanker brethren.