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Saturday, December 16, 2017

In the current tight market balance anything can happen

Developments in the oil market have been dramatic since Hurricane Katrine struck the U.S. Gulf. We will not try and compete with all the analysts that are commenting on the current situation, as what is said today may not be valid tomorrow.

In this situation we find it appropriate to “translate” some of Allan Greenspan’s monetary policy “commandments” to the tanker market: 

  • Keep your options open – the shipping and commodity markets change so fast that decision makers cannot rely on formal rules
  • Do not get caught in an intellectual straitjacket – be flexible and prepared to change your mind
  • Forecasts – though necessary – are unreliable - owners should be sceptical and spend time examining what is going on in the market right now
  • Optimisation works in theory - but risk management is better in practice

Given the current tight market balance anything can happen. However, with oil prices increasing since 2003 and a tight oil supply situation, we may be at a turning point in the tanker industry. It is easy to become too excited by the current circumstances. Previously political risk was regarded as the greatest risk in the oil industry – today it is the weather.  

The industry is struggling to find new large oil fields, and the cost of exploration and development is skyrocketing. This may mean that oil prices continue to be relatively high and that we are entering a period of changing patterns of consumption. The short-term situation in the product tanker market may be interesting with refinery capacity tight world wide.  

The tanker fleet is set to increase by some 6% this year, but the demand side of the equation looks very complicated. In the short term more crude may have to be imported to the U.S. to compensate for the platforms that have ceased production. But refineries, pipelines and other infrastructure are needed to be able to receive and process the oil, and a number of these have been affected by recent events. 

Contact: Erik Ranheim