Well, I didn’t sleep well on Wednesday night- the first reports of the Russian invasion into Ukraine came in when I was nodding off. But a little something on the news jarred me awake. So here we are- shipping will be affected; indeed, on Day 1 of the invasion, a drybulk ship sitting near a Caspian port was struck by artillery. One participant in Capital Link’s excellent online session regarding Jones Act / U.S. maritime finance described “extreme market volatility” in the financial markets- with various deals in progress possibly put into a holding pattern until things settle down. Other panelists in the Capital Link event cited extreme moves in commodity prices which were happening in the weeks leading up to the Ukraine fighting. The price of North Sea oil touched $100/barrel, with the spread of Brent over WTI moving up to levels not seen in since the mid 2010’s. More on that in a bit.
So, what might happen as the situation evolves? It did not take any military weaponry to shatter my freight forecasting crystal ball, but I’ve been giving it some thought- even before this week’s fits of insomnia. When asked by investor friends about the impact of military conflicts on shipping, the old maxim of “War, Pestilence, and Famine”, the “Big 3” in stimulating the markets, was my instant answer.
Obviously, the energy markets are in the cross hairs. In the instant case, oil cargoes (and other cargo, including on the dry side) coming out of the Black Sea will be halted, and there could be some changes in the natural gas side. Since energy was not sanctioned in a big way (so far), cargoes will still move out of the Baltic region, or the northern reaches if they are not frozen. But, speaking of “frozen”, the financial side might be constrained, so it will be far from business-as-usual. For example, Sovcomflot (with 130+ vessels of 11 mdwt- being essentially state-owned, even after a 2020 offering of shares) is sanctioned, so cargoes may need to be moved on other tonnage. And L/Cs financing cargoes? That’s beyond my visibility but if Russian financiers are involved…then, welcome to the freeze.
In shipping, things move around-this could be cargo stems (if ports are actually closed due to hostilities, or otherwise off-limits), and, alternatively, cases where vessels are substituted to handle cargoes where the loadport is unchanged. The folks from Rystad Energy note that: “The escalation immediately jeopardizes up to 1 million bpd of crude supplies that transit through Ukraine and the Black Sea….” (leading to the former, and not the latter).
Now we get into Shipping 101 (grades are being assigned, pay attention!!!)- what drives the markets is the intersection of supply and demand; shipping is sometimes lauded as the closest example of “pure competition” (beneficial cargo owners on the liner side might disagree at this moment in time- save that for another article). When one ship must be substituted for another; let’s say a Sovcomflot vessel was set to load a cargo- then suddenly the charterers need to find another vessel. Even in the underutilized tanker trades, the ships must then do a geographical dance where they switch positions- with more ballasting (empty). When a loading area is cut off, charterers will try to source their cargoes in other loadports- if possible. In such cases, vessels must deviate (or perhaps they will be switched around with other vessels in better position). By the way, those Brent versus WTI spreads may have something to do with the switcheroos, but suddenly more vessels are required to move the same barrels.
The computer boffins and the optimizers that I have poked fun at in various articles will have an absolute field day with this stuff. Maybe with artificial intelligence (AI), re-allocations (of matters related to which vessel is taking what cargo) can be done more optimally than those done by old time tanker guys- though I am not so sure (myself being closer to the latter camp). While the AI guys and the old-timers are battling it out, vessel supply will be stretched. There are already rumblings of way stronger Worldscale numbers on oil tanker fixtures. Tanker shares are finally having a day in the sun- investors get an A+ in Shipping 101, at least this week.
