• SEPTEMBER 11, 2000

Shipping Vs OPEC

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!

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407