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Saturday, December 16, 2017

New thinking in the oil markets?

It is a time of some new uncertainties on the oil markets – and therefore for tanker operators. The 1980s and 1990s saw a new era of  cross trading with new delivery routes for crude as well as for refined oils – and this coming after years of a relatively simple trading structure in the 1960s and 1970s which meant long and unproductive ballast legs. Are we in the following decade now looking at some shifts in the oil markets that could effect more permanent changes to our business environment? 

Oil prices have been USD 50-60-70 a barrel after years of prices hovering somewhere between USD 15 and USD 30. Will they go back down again? Yes, probably, ‘they’ say, but how far? In the early 1970s oil prices exploded from USD 2/bbl  to USD 12/bbl. Did they go down again? No. But then demand was outstripping supply, pushing Saudi oil production from 3m to 8m bbls/day in just four years. Then in the late 1970s oil prices jumped again from USD 18/bbl to USD 40+ - but they dropped back again as supply outstripped demand. 

Now we are again in a situation where oil prices have increased -  threefold this time – and right now world oil demand is surging and supply is tight as well as refining capacity . . . which leads us to a new wild card. Richard Branson, boss of the Virgin empire which has successfully challenged the status quo on a number of fronts including sound recording and airlines, is planning to build his own oil refinery to supply his own planes with jet fuel. 

A new Virgin company, called Virgin Oil, is working on a USD 2bn refinery in Newfoundland or in Europe. The global lack of oil refining capacity and sky-high product prices has led Branson to look further than high crude oil prices and to accuse the oil companies of holding the world to ransom as they profit from the current energy crisis. It is reported in the financial press that Branson is pushing for the U.K. government to support his project by placing a windfall tax on oil companies and using the revenue to help fund much-needed new refinery projects. Will Branson shake up the oil industry, or will his project simply run in parallel with the rest? 

Another controversial issue from a free-thinking mind is the confronting of the complacent notion that there are ample oil reserves in Saudi Arabia to fuel significant projected increases in world oil demand over the next 30-40 years. Matthew Simmons, Chairman of Simmons and Company International, the largest investment banking practice serving the energy industry, has recently published a book in which he analyses the present condition of Saudi oil exploration and production and details the small number of huge but ageing oil fields that account for virtually all the kingdom’s oil production and which have been producing at very high rates for over 50 years.

 He asks, “as a matter of greatest urgency”, whether Saudi Arabia will be able to deliver the oil that we have all come to depend on – such dependency includes the common assumption that the Saudis will be producing 20-25m bbls/day by 2030. Called ‘Twilight in the Desert – the coming Saudi oil shock and the world economy’, this book is shaking up traditional thinking in the oil industry as well as opening the eyes of laymen to the complexities of extracting oil from the ground. 

New market trends? Changes in the way our business works? No one is sure. But the oil market promises to keep us on our toes. 

Contact: Bill Box