Oil transport means and modes and the 2020-2021 crisis

The current international shipping market can be described as ups and downs. Tariffs in this market have repeatedly reached new highs. The strong economic rebound in 2021 has become the driving force behind the cyclical increase in the market. After the frenzy in the first half of 2020, the international shipping tanker market has been affected by negative factors, including the general lack of demand for oil transport.

In the first half of 2021, international oil prices performed strongly and positively. Compared to the steady upward trend in crude oil prices, the international tanker market – after experiencing a setback in the second quarter of 2020 – was affected by a general lack of demand for oil transport; a delay in the dismantling of old ships; regular delivery of new ships and high demand for seaborne oil storage. Negative factors, such as the reduction of tankers in ports, continued to be bleak. Under the “new normalcy” of Covid-19, the first priority for shipowners has been to survive and the pace of rebalancing the supply/demand ratio of tanker transport has accelerated.

Global demand for oil has gradually recovered, but is still below its pre-Covid-19 level, leading to shortages in the international tanker market as a whole.

In its outlook for 2022 published on January 10, 2022, the International Energy Agency (IEA) stated that oil demand is forecast to increase by 900,000 barrels per day throughout 2022, and the Agency expects transport demand to recover strongly in the second half of this year.

The decommissioning of old international tankers has been delayed, while newbuildings have been delivered as usual, resulting in severe overcapacity. During the pandemic in the first half of 2020, the market for oil transport was on the high side and a large number of shipowners procrastinated plans to dismantle old tankers, many of which were used for “floating” storage. After the sharp decline in the tanker market, under US extreme pressure on Iran and Venezuela, many old tankers were moved to sensitive routes and the capacity of old tankers decreased very little. At the same time new tankers were delivered on time and this greatly increased the pressure and the IEA’s positive outlook. The overall capacity of tankers was increased.

At present, the international oil market is in the destocking phase, as the structure of the international oil price market is reversed – i.e. the oil storage market has declined and the demand for floating offshore tanks has been reduced significantly. The increase in oil prices is accompanied by the first change in the structure of price differentiation. Since May 2020, the market has been scarce. It has entered a destocking phase and there has been a fluctuation in the demand for reserves. The rental price has fallen again and the capacity to move offshore has been significantly reduced. Temporary offshore floating tanks are constantly being released during the destocking phase, which means that an increasing oil supply capacity is entering the market.

The blockades of the port and Suez Canal had little impact on supplies to the West. Since the outbreak of Covid-19, European and US ports have been affected, resulting in low operating rates, port congestion and severe tanker delays, which have continuously raised the international maritime transport market. Nevertheless, the quantity and value of refined petroleum products that previously passed through the Suez Canal were relatively large and the impact was also considerable. In recent years, however, numerous refineries have been built in the Near and Middle East, the Persian Gulf, the Red Sea, the West Indian coast, from which large quantities of refined oil (including aviation kerosene, diesel oil, etc.) have been exported to Europe. Those quantities were originally handled through the Suez Canal that, as seen above, was made less operational by the aforementioned crisis.

The current charter market is even bleaker: in the second quarter of 2021, the owners of supertankers, the so called very large crude carriers (VLCC), could only accept a return of around 2,000 US dollars per day on freight. The demand-side recovery of the international tanker market is limited and the contradiction of oversupply has become more acute. The international tanker market is in urgent need of rebalancing. In the second half of 2021, global oil demand continued to grow. This improved the international tanker market, but obviously a sharp recovery was not possible.

The current link between the international oil market and the tanker market is similar to the collapse of international oil prices after the financial turmoil of 2008. In March 2009, international oil prices bottomed out and started to rise, but with short spikes. The downturn in the international tanker market lasted until 2014.

Today, as demand recovers, the main variables for the second half of 2021 must be considered. After oil prices being negative, can OPEC+ (i.e. the merger of OPEC and ten other oil exporting countries such as Russia and Kazakhstan) become increasingly influential due to high oil prices? In response to the impact of Covid-19 on the global economy and oil demand, OPEC+ implemented historic production cuts as of May 1, 2020. The scale of production cuts was gradually reduced from 9.7 million barrels per day in May-June 2020 to 5.8 million barrels per day in 2021. At the regular monthly Ministerial Meeting of the major oil-producing countries in early July 2021, the UAE and Saudi Arabia jointly led the oil-producing countries to suspend their production agreement. While the two sides did not share a common view on whether the benchmark used to calculate the UAE’s production share should be adjusted if the production cut were extended from April 2022 to the end of the year.

At the Ministerial Meeting of July 18, 2021, the major oil-producing countries finally agreed on a plan to increase production and endeavour to end production cuts completely by September 2022. International oil prices fell after the decision was taken, reflecting market concern that conflicts within OPEC+ could be amplified due to competition for market share at high oil prices. Although the market has increased since then, OPEC+ has always struggled as it is very difficult to find understandings, not to mention that Iran is waiting for an opportunity to return to the market to compete on price.

Since the Biden Administration took office, Iran’s re-entry into the international oil market has become the biggest supply-side variable. As early as Trump’s Administration, the United States has put extreme pressure on Iran, but the impact of the epidemic in 2020 – combined with the Saudi price war – has driven up oil prices. National shale oil and gas companies in the United States have been severely damaged and it has been difficult to curb the rise in oil prices on the supply side. Since 2021 international oil prices have continued to rise and the price of gasoline in the United States has soared. On the US West Coast, where the price of refined oil products is the highest in the country, the price of gasoline on June 28, 2021 was 3.811 dollar per gallon (or 1.006 dollar per litre), with a 1.057 dollar increase per gallon (it was 0.728 dollar per litre in June 2020).

The US Consumer Price Index (CPI) for all urban consumers increased by 5% from May 2020 to May 2021. Food prices increased by 2.2% and energy prices by 28.5%. Prices of all other commodities and goods increased by 3.8% for the year ending in May 2021: this has been the largest twelve-month increase in the year since June 1992.

With a view to ensuring stable economic growth and curbing inflation, the Biden Administration needs Iranian crude oil. The same holds true for diplomatic and strategic considerations.

In the Iranian elections of June 18, 2021, Sayyid Ebrahim Raisol-Sadati – known as Ebrahim Raisi – was elected eighth President of the country with 72.35% of the vote. Iran’s return to the nuclear deal is expected to become a trump card for President Raisi, although Iran has demanded credible guarantees that a future US President would no longer unilaterally withdraw from the agreement as Donald Trump did on May 8, 2018. Once the hoped-for agreement on the Iranian nuclear deal is reached, the sanctions imposed by the United States on Iranian oil and shipping companies are expected to be lifted simultaneously. The units of the Iranian National Tanker Company (Shirkat-e Mili-ye Nuftekâshi-ye Iran), which disappeared from the market due to sanctions, will return to the international transport market, and the general situation of overcapacity should accelerate the dismantling of older tankers.

Since 2021 China’s adjustment of its oil import and export policy has shown that – based on the peaking and carbon neutrality requirement – the intensity of oil demand cannot be sustained. This means that – as China is the world’s largest importer of crude oil – it will adapt to the guidelines set by the Chinese government. China’s great long-term demand for crude oil needs to be revised.

With regard to international tanker construction, as steel prices continue to rise, the market for tanker scraps is booming and cash earnings from dismantling old ships continue to increase. The International Maritime Organisation (IMO) has continuously improved ship technical specifications and this has favoured the reduction of old transport capacity in the maritime sector. Furthermore, the International Convention for the Control and Management of Ships’ Ballast Water and Sediments (the so-called Ballast Water Management Convention of February 13, 2004) stipulates that all ships must install a ballast water management system by September 8, 2024 or use the ballast water carried by the ships, treated by means of a specific management system. At the moment, the deadline is still almost 40 months away, and an industry survey agency has found that there are still around 35,000 ships worldwide that need to be repaired with the installation of such systems.

Meanwhile, on June 17, 2021, the 76th meeting of the Marine Environment Protection Committee adopted a resolution on reducing ships’ carbon emissions and set a 2% reduction in carbon intensity each year from 2023 to 2026. The vast majority of the world’s ships must meet this target: according to this requirement, if the oldest ships are not adapted to these parameters, they will not be able to operate legally.

Based on the continued expectations of the international tanker market, the shipowners’ motivation to dismantle ships has increased, rather than spending money to refit old ones. Deliveries of newly built tankers are expected to decrease as from 2023. The task of satisfying the supply side of the international tanker market could bear fruit as early as this year.

In the first half of 2021, the international maritime tanker market was struggling with sluggish oil prices and shipowners were suffering. In the second half of the year, global oil demand recovered, although there was residual hope for shipowners to raise freight rates. If the various crises recorded over the past two years show visible signs of ending, trends will certainly improve.

Giancarlo Elia Valori
Giancarlo Elia Valori
Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is a world-renowned Italian economist and international relations expert, who serves as the President of International Studies and Geopolitics Foundation, International World Group, Global Strategic Business In 1995, the Hebrew University of Jerusalem dedicated the Giancarlo Elia Valori chair of Peace and Regional Cooperation. Prof. Valori also holds chairs for Peace Studies at Yeshiva University in New York and at Peking University in China. Among his many honors from countries and institutions around the world, Prof. Valori is an Honorable of the Academy of Science at the Institute of France, Knight Grand Cross, Knight of Labor of the Italian Republic, Honorary Professor at the Peking University