Lower prices on oil usually mean saving money. But not everyone gets the benefits of the current dip in price. And the Coronavirus still plays a part in lowering the demand.
Will the lower oil prices actually result in larger profits for actors in the shipping industry?
As with so many other things in container shipping, the answer isn’t a simple yes or no. But that won’t stop us from looking into it – and try to get some answers for you.
Several factors are playing into a shipping industry, that isn’t behaving as it used to. Lower oil prices usually spur higher demand. But with the Corona pandemic consumer behavior isn’t responding in its usual way.
And with the COVID-19 and international political fights, the stage is set for uncertainty in the market. As well as an industry where not all are getting the benefits of lower oil prices.
COVID-19 mixed with geopolitical fights
The price of oil has plummeted to under $20 per barrel. A historic low. A drop that slowly started when China began shutting down because of the Coronavirus. A virus that spread to a global lockdown. Lowering the demand of export significantly. As well as increasing the drop in demand for oil.
At the same time, a battle began at an OPEC+ meeting. It was hoped that the meeting would result in the countries agreeing to extract and produce less oil. An attempt to take the lower demand of the market into consideration due to COVID-19.
But the meeting didn’t go quite as planned. Russia refused to reduce its oil production. Not wanting to give up some of its market shares to the U.S. oil producers.
However, there’s also a third component affecting oil prices. The IMO 2020 sulphur cap regulation that went into force on January 1st this year. You can hear more about how this regulation together with the Coronavirus and oil crises affect the oil prices in our Digitalks. We have talked with Jan Tiedemann, Senior Shipping Analyst, from Alphaliner – and he has given his insights on the topic. You can find the Digitalks here.
With lower oil prices come larger demand. Usually. But lower oil prices with the restrictions of the Coronavirus create something else. Contradictions. Reducing the benefits for container users and suppliers.
Saving and costing money
Low prices on oil would usually cause for a cheerful industry. And there is some good news. Although they’ll most likely be short-lived.
Because of the low prices, container lines will experience fewer bunker costs. Something that would save them money, at least for a while. But that won’t continue. Because as much as that is good, the downside of the lower demand for oil will also hit.
The oil prices began going down because of the lack of production and transportation around the world. In other words, the inactivity induced because of the Corona pandemic. Inactivity that has led to lower demand for import and export around the world.
Normally lower transportation costs encourage customers and consumers to buy more. But because of the restrictions and uncertainties with the pandemic things aren’t as they usually are. There is less spending less. And less shipping.
And a lower demand for commodities will most likely also hit the oil-producing countries. With a lower – or lack of – profit from selling the oil, the countries will be greatly affected. Something that would limit the demand for import to these countries.
However, some analysts believe that the large amount of crude oil will make the freight rates go up. Thus, creating a revenue possibility for shipping lines. But also, be an added expense for container users.
The BAF baffles
All of this, of course also affect container owners and users. With lower container demand, the profit is shrinking. And it’ll shrink even more if the freight rates go up. Yet another thing to take into consideration.
Luckily, things seem to be changing. The world has begun opening factories and producing more. Creating a need for more containers to carry shipments around.
Even with the lower oil prices the transportation costs, many places haven’t gone down. The bunker adjustment factors (BAF) have stayed the same. Shipping lines usually remove BAF charges when oil prices go down. Something many shipping lines have been slow to do, keeping the BAFs in the contracts on many routes.
A move, that ensures more money rolling into the shipping lines. But also taking away a chance for freight forwarders to save money on the lower oil prices.
The coronavirus has changed the game, as we know it. The dropping oil prices would usually create a boost of money intake for both users and suppliers of containers. But with firms being unsure of the future, oil prices don’t have the same positive impact as they would normally.
SOC containers give flexibility
How to deal with the current situation in shipping can be tricky. With the unknows of rising charges, thinking in different lanes can be a good option for you. With one-way SOC containers, you can save money on demurrage and detention charges.
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