Shipping shakes off short-term Saudi disruption but awaits detail on energy trade outlook
Despite an initial 20% hike in oil price with associated bunker price implications, the immediate disruption to shipping following the attack on Saudi Arabia’s production over the weekend looks manageable. The vagaries of alternative energy sourcing and energy trade reorganizations could yet bring opportunities along with the inevitable risk.
A squeeze in long-term supplies is not the issue given well-stocked oil reserves, even with the repair timeline likely to drift into months. The detail of alternative energy sourcing arrangements, bunker price implications and the security risk yet to emerge as retaliations beckon are the pressure points for shipping.
THE shipping industry has been left dividing its attention between the immediate fallout of a 20% hike in the oil price — the biggest spike in almost 30 years — and the mid-term implications of Saudi Arabian production potentially not being back up to full production for months rather than weeks as had been initially assumed.
Saturday’s attack on Saudi Arabia’s pivotal Abqaiq processing facility and Khurais oil field shut off 5% of global crude output, triggering the biggest surge in oil prices since 1991.
Prices eased after the US confirmed the release of emergency supplies and oil producers reassured markets with details of well stocked inventories that will more than make up for the shortfall immediately, but the fallout for shipping markets is still far from clear.
Lloyd’s List Intelligence vessel tracking data showed very large crude carriers stacking up outside the country's largest oil export terminals in the port of Ras Tanura, which can normally handle about 6.5m barrels a day. While any immediate congestion is likely to quickly dissipate once operators redirect vessels around the immediate shutdown, the attack has cut Saudi exports by about three VLCCs per day, most of which are intended for the Far East, in particular for China.
Saudi Aramco has sought flexibility from its major crude buyers in Asia to take heavier grades and switch or delay loading dates following supply disruptions from its two key plants that pump out light sweet crude. But so far the mood from importers does not seem panicked and Asian importers of Saudi oil have expressed confidence that they will still have access to supplies even if the market turns to a slight premium from the discount previously forecast due to a slowing global economy.
Oil reserves are well stocked in Saudi Arabia and internationally, where most countries chose to build up inventories during 2014-16 when oil prices were lower, but the prospect of alternative sourcing of oil by Asian importers in the event of mid-term disruption could dramatically redraw the current energy trade routes and offer significant opportunity for tanker tonne-mile extensions.
The key to the long-term picture remains how long it will take Saudi Arabia to get production back up to speed in the wake of the drone attack. Estimates and reports at this stage remain a matter of speculation. However, the current consensus view appears to be that the time frame will be measured in months rather than weeks.
“I think we will be surprised how long it takes to get Saudi production back online fully,” said Peter Sand, BIMCO’s chief shipping analyst. “Coming so soon after the fire that shut down Philadelphia Energy Solutions refinery complex in late June, we know how difficult it is to get refineries back online quickly. Anything as damaging as attacks like this — I think it’s wishful thinking to suggest a refinery like [Abqaiq] can be rebuilt in weeks.”
While the timing of Saudi’s production resurrection is key to calculations, Mr Sands urged perspective when taking the long view. “Even with this significant disruption we could see countries draw down on stocks and cover the shortfall for the next year and a half if necessary — we can remain cool for some time yet and don’t forget it’s still very early days,” he told Lloyd’s List.
A more immediate concern for shipping will be the mid-term implications for bunker prices. While the attack has not yet had a significant impact on the bunker supply market, higher costs for marine gasoil, which is heavily linked to oil future pricing, will inevitably see a hike in anticipated pricing.
“Going into 2020 and the challenge of passing on these higher costs of already more expensive fuels will be increasing, and this attack is only going to add pressure on the industry as it readies itself for the January 1 [sulphur emissions] deadline.”