Wednesday, December 30, 2015

Tyler Durden: Something Strange Is Taking Place In The Middle Of The Atlantic Ocean // Recession, retrenchment, revolution? Impact of low crude prices on oil powers

"The idea is to keep tankers on the water as long as you can and try to find a stronger market."

Early last month, we noted that something very strange was happening off the coast of Galveston, Texas.  As FT reported, "the amount of oil [now] at sea is at least double the levels of earlier this year and is equivalent to more than a day of global oil supply.” In short: the global deflationary crude supply glut is beginning to manifest itself in a flotilla of stationary supertankers, as millions of barrels of oil are simply stuck in the ocean as VLCCs wait to unload.

Ultimately, this led to nearly 40 crude tankers with a combined cargo capacity of 28.4 million barrels waiting to anchor near Galveston. In the latest sign that the world is simply running out of capacity when it comes to coping with an inexorable supply of commodities, three diesel tankers en route from the Gulf to Europe did something rather odd on Wednesday: they stopped, turned around in the middle of the ocean, and headed back the way they came! "At least three 37,000 tonne tankers - Vendome Street, Atlantic Star and Atlantic Titan - have made U-turns in the Atlantic ocean in recent days and are now heading back west," Reuters reported, citing its own tracking data.

The Vendome Street actually made it to within 800 miles of Portgual (so around 75% of the way there) before abruptly turning around. "Ship brokers said a turnaround so late in the journey would come at a cost to the charterer," Reuters notes. The problem: low prices, no storage capacity, and soft demand. Here's Reuters again:

"European diesel prices and refining margins have collapsed in recent days to six-year lows as the market has been overwhelmed by imports from huge refineries in the United States, Russia, Asia and the Middle East. At the same time, unusually mild temperatures in Europe and North America further limited demand for diesel and heating oil, ptting even more pressure on the market. Gasoil stocks, which include diesel and heating oil, in the Amsterdam-Rotterdam-Antwerp storage hub climbed to a fresh record high last week. As of now, it's "unclear if the tankers will discharge their diesel cargoes in the Gulf Coast or await new orders," but what you're seeing is a supply glut so acute that tankers are literally just sailing around with nowhere to go as there are reportedly some 250,000 tonnes of diesel anchored off Europe and the Mediterranean looking for a home. On that note, we'll close with the following quote from a trader who spoke to Reuters: 
"The idea is to keep tankers on the water as long as you can and try to find a stronger market."

The decision to strike a nuclear agreement with Iran, which has more oil reserves than all but four Opec countries, will over the coming months unleash new Iranian oil into the markets. Analysts expect Iran to pump 1m or more barrels a day as a result, so the prospect of the deal has been driving prices down in recent weeks – by about 15% – interrupting a stabilising in the price of oil since the big plunge last year. Even before the Iran news, the clash between the US and Saudi Arabian energy interests had created a volatile new force in the global economy and unprecedented challenges for the two largest producers. The Saudis need high prices to fund their nation but have lost control of the market because of the oil boom in the world’s largest economy. The United States, after years of easy growth, is grappling with painful adjustments –including tens of thousands of layoffs – with the hope of staying viable amid the price collapse... read more:
http://www.theguardian.com/business/2015/jul/21/falling-oil-prices-fracking-us-iran-saudi-arabia-opec

A glut of oil, the demise of Opec and weakening global demand combined to make 2015 the year of crashing oil prices. The cost of crude fell to levels not seen for 11 years – and the decline may have further to go. There have been four sharp increases in the price of oil in the past four decades – in 1973, 1979, 1990 and 2008 – and each has led to a global recession. By that measure, a lower oil price should be positive for the world economy, with lower fuel costs for consumers and businesses in those countries that import crude outweighing the losses to producing nations.

But the evidence since oil prices started falling from their peak of $115 a barrel in August 2014 has not supported that thesis – or not yet. Oil producers have certainly felt the impact of the lower prices on their growth rates, their trade figures and their public finances butthere has been no surge in consumer spending or business investment elsewhere.

Economists still reckon there will be a boost from a lower oil price particularly if it looks as if the lower cost of crude will be sustained. Dhaval Joshi, an economist at BCA, a London-based research company, said: “A commodity bubble has deflated three times in the past 100 years: the first was after world war one; the second was after the 1980s oil shock; the third is happening right now.” For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt. Oil powers base their spending plans on an assumed crude price. The graphic below shows just how far below water their budgets are... Read more: