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Shipping Vs OPEC

Sep 11, 2000

The Organisation of Petroleum Exporting Countries (OPEC) has agreed to raise oil supply by 800,000 barrels daily, the third time this year. Shipping companies are set to benefit the most as a result of this hike; both in terms of cost as well as realisations. We take a closer look at the possible impact to the shipping industry. In spite of the positive correlation between the crude prices and freight rates (freight rates tend to go up when crude prices improve), freight rates are not expected to soften atleast for one year. The reason for this is that, oil reserves in US are at the lowest in the decade. As US starts piling up inventory (inclusive of heating oil as the winter nears), the million-barrel activity would pick up across the Pacific, Mediterranean and the Gulf region. Further, the increase in oil output is expected to boost demand for Very Large Crude Carriers (VLCCs) by 2%-3%.

Perking up…
Baltic Freight Index 1,695
Biffex-October* 1,730
Biffex-November* 1,735
Biffex-January (2001)* 1,710
Biffex-Apr (2001)* 1,675
Gas Index 1,527
Product Index 1,695
Tanker Index 2,275
as on September 11, 2000
* Indicates the forward rates for the respective months

Steady demand coupled with shortage of tonnage could further push the million-barrel rates globally. Moreover, oil spills and strict marine regulations would lead to huge scrapping of existing available tonnage. This would mean that companies would start outsourcing capacities for transportation of crude. This may further push up the freight indices. Shipping companies will also benefit as a result of hike in output as the Brent price would come down thus bringing down the bunker costs.

Going down...
Crude 32.25
Brent 32.78
as on September 11, 2000

Nevertheless, there are some grey areas. Major oil companies’ like BP-Amoco, Exxon-Mobil have slated huge capital expenditure plans in the future to enhance their existing capacities. The order book also indicates that fresh tonnages are expected pour in the later half of FY01. This may pressurize the overall freight rates.

However, Indian shipping companies have not much to cheer about as a result of this since compared to the global tonnage the Indian capacities are just a drop in the ocean!

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