Europe View: War drums could spur tankers

Europe View: War drums could spur tankers

The entire oil industry, from traders and refiners to tanker owners and shipbrokers, is starting to believe an attack on Iraq by the United States is inevitable, and the key players are trying to gauge the likely impact, immediate and long-term, of a resumption of hostilities in the Persian Gulf.

Oil prices have risen strongly in the past month, briefly topping an 18-month high of just over $30 per barrel last week on fears an attack on Iraq will disrupt supplies from the Middle East, which exports some 17 million barrels per day of crude to Europe, the U.S. and Asia.

The market has retreated after Saudi Arabia made clear OPEC will make up any shortfall in Iraqi shipments by releasing some of its 5.5 million b/d idle capacity but it could soon rally again as more OPEC members rule out an increase in production in the fourth quarter, when demand rises to a seasonal high.

The outlook is much more uncertain for the shipping industry. A price spike would deliver a double whammy to container lines and dry bulk operators through higher marine fuel costs and a slowdown in world trade. For every $5 a barrel rise in the price of crude, if sustained for a year, figures to shave a quarter of one percentage point off global economic output, depressing demand for consumer and capital goods and raw materials. The bulk and container sectors are already on the floor: in the past two years average daily earnings of a 150,000-160,000 deadweight tons Capesize bulk carrier have halved to $10,000 and the charter rate for a 2,000-TEU gearless container vessel has plunged from $18,000 a day to around $8,500.

The fallout of military action for the tanker business is more difficult to gauge. Rates for very large crude carriers have plunged to near 10-year lows and operators of modern supertankers are losing up to $20,000 a day because there are too many ships chasing too few cargoes. (There are around 90 vlccs and ulccs (ultra large crude carriers), two thirds of them modern, available to load in the Persian Gulf in the next 30 days.

Iraq itself has not loomed large as a factor in the tanker market as Baghdad continues to haggle about a pricing mechanism with the United Nations, which administers its sales under an "oil-for-food" program. In July only 17 cargoes were lifted on the tanker spot market, according to Clarkson, the top London tanker broker - 10 from Mina al-Bakr, the Iraqi oil port, and seven from Ceyhan, the Turkish port on the Mediterranean that receives Iraqi pipeline crude.

But a suspension of Iraqi exports on the outbreak of hostilities would give the tanker market a sorely needed shot in the arm. Ceyhan exports likely would be replaced by Saudi crude, boosting demand for long-haul tanker transport. Traders probably would charter tankers to store oil as they did during Desert Storm in 1991, restricting the supply of tonnage and triggering a spike in vlcc rates.

Looking further ahead, industry watchers say a new regime in Baghdad, free from UN curbs on exports, likely would sharply increase sales to finance reconstruction of the country, thus boosting demand for tankers.

Maybe. What is sure is that moves to defuse the decade-long threat from Iraq, the world's second-largest oil source, coupled more recently by increasing strains in its relationship with Saudi Arabia, the largest, following the Sept. 11 terrorist attacks, have revived the debate about the United State's dependence on imports from the politically unstable Middle East.

The U.S. is intensifying its efforts to find alternative suppliers and that will, in time, impact on the tanker market. The process is already underway, with Russia and Africa emerging as the most promising candidates. Russia has boosted output to around 7.5 million b/d this year compared with a peak of 12.2 million b/d in the Soviet era, overtaking Saudi Arabia as the world's top oil producer Riyadh implements OPEC-mandated cuts to support prices.

Russia's privately-owned oil companies are eyeing fresh export markets, including the U.S. The arrival of the first direct shipment of Russian crude to U.S. shores at the port of Houston on July 4 was dismissed as a public relations exercise to raise the profile of Yukos, Russia's largest oil company, in the west.

But a spate of investments in new oil export terminals in the Baltic Sea and the Black Sea coupled with investments in foreign fields, suggest Russian oil companies are serious about breaking into new markets. Right now, shipping to the U.S. makes sense only because of the high oil price. But this is not an insurmountable problem: Lukoil, the second largest Russian oil group, which owns the Getty gas station chain, reckons the export shipping terminal it is building for the Tieman-Pechora oilfield in the Arctic will give it a competitive edge in shipping to the American market.

The U.S. also is laying plans to boost the share of imports from West Africa from 15% to 25% by 2015. The timetable likely will change, with claims that Washington is discreetly encouraging Nigeria, currently the fifth-largest exporter to the U.S., to quit OPEC so it can sharply increase exports without the constraint of quotas. Nigeria has denied the reports but it is pushing for an increase in its OPEC quota and plans to boost capacity from around 2 million to 3.3 million b/d by 2004.

Western oil firms also are stepping up exploration activity in the oil-rich region around the Gulf of Guinea and are keen to boost Angola's output following the recent peace agreement that ended years of civil war.

These long-term developments are not much consolation for the tanker market as the storm clouds gather over the Middle East but they indicate there are rich pickings ahead for the owners that survive the current slump.

Bruce Barnard is the European correspondent for JoC Online.