Commentary: Crude oil tankers on hold

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Crude oil tankers came to the rescue early in the COVID-19 pandemic by acting as floating storage tanks. Saudi Arabia and Russia increased crude oil production in early 2020, launching a price war that ran through April while the pandemic was spreading. Each agreed to a cut in production, and “OPEC+” members are continuing with various cuts in month-to-month production through April 30, 2022.

Crude oil supply last year exceeded not only demand but also storage capacity. Data provided by Kpler showed that the peak in floating storage was reached last July with about 190 million barrels. By the beginning of 2021, it was around 80 million barrels. While this has been a welcome drawdown, it is still well above the typical annual average of 20 million barrels. When conveyances are used for storage rather than transport it gives consignors, consignees and carriers time to make adjustments and ride out disruptions to the market. Of course, no one gains if the disruption is protracted; but the market for crude oil is stifled by further government-mandated lockdowns and other restrictions on economic activity. For crude oil, this is felt downstream as the continued lull in long-haul passenger air travel means less demand for refined fuel.

Normally, the fall in shipping prices would induce an increase in the demand for transport. This is especially true for bulk commodities like crude oil since transportation makes up a larger share of the landed cost of imports in comparison to high value-added items like cell phones, pharmaceuticals, etc. A more price-elastic demand for bulk transport suggests that a fall in shipping prices would induce an even larger percentage-wise response in the amount of crude oil shipped. In normal times, this effect would be expected to increase carrier revenues. Alas, those price signals do not work at the moment, and many oil tankers are docked with inventory on board or are simply empty. Euronav, the world’s largest crude oil carrier, announced last November that it would drydock nine of its tankers by the end of 2020. This represents 14% of its fleet of 64 tankers.