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Cheap oil and shipping

As I write, the price of Brent Crude sits at $86 a barrel. If it stays below that level for any significant amount of time how is that going to affect the shipping industry?

It’s a big topic but here are some general thoughts to start.

Any country or group that consumes more than it produces gains most of all and so from that point of view China and Japan amongst others are set to win.

For key exporters the impact is of course negative but the extent varies dramatically. Russia and Saudi Arabia have a breakeven oil price of over $90 per barrel to finance their spending plans but they have significant reserves so it would have to be a long term price fall to start having a serious affect. Countries like Venezuela and Iran however have break even prices of over $120 per barrel and less reserves so that could weaken them significantly. You could argue that would produce a wry smile in Washington but it could also make those regimes more hard-line and produce more instability.

The impact economically on America will be mixed because the country is simultaneously an importer and producer of oil but the overall affect would probably be positive.

Agriculture based economies would do well because agriculture is more energy-intensive than manufacturing. India in particular will benefit which may offer a boost to all parts of the economy.

The specific effect on shipping is hard to gauge.

We are always told that cheaper oil is better for the global economy and that is certainly true. As a rule of thumb a 10% change in the price of oil is associated with a 0.2% change in the global GDP. Good news for shipping – a healthier global economy means more goods transported by sea.

Overall global growth would obviously be welcome and you could argue that the dry and container shippers would benefit the most from that. The lower price may also stimulate demand for oil and hence tanker owners could benefit from increased utilisation.

However extracting oil from shale is expensive as are the Arctic and Canadian tar sands. As the price of oil drops these projects become more tenuous (based on the current technology). The oil price will also affect the demand for and supply of natural gas.

The same rings true for mature oil fields. I wait to be corrected but someone at a conference mentioned to me that oil sub $80 a barrel makes North Sea production questionable. This would have a significant impact on the offshore shipping/supply sector.

Bunker traders also won’t be cheering the price drop. They have benefited significantly as the price of oil has risen and the reverse will be true on the way down. However increased volatility may help to offer some opportunities.

We’ve just scratched the surface with this but as always we welcome your thoughts. Get in touch by tweeting @spinnakerglobal.

This article was written by Eric Branson, Manager, Commercial Division, Spinnaker Global

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