Shipping and $200 oil
The U.S. Pres keeps asking Saudi Arabia to increase production. Saudi Arabia finally agreed to a 300k barrel increase after repeatedly explaining to deaf ears that there was plenty of supply. Plenty of supply you say? Surely I'm crazy, insane, etc. But, no, I'm not insane ... as the following facts will show it's not a supply problem but actually a demand problem ... but not where you think! Read on ... .
The first spot of trouble setting up the perfect storm was the agreement to stop using single hull tankers. Double hull (DH) tankers offer better protection for the environment with the promise of reduced leakage risk. On 11/11/2007 a Russian single hull tanker broke in a storm spilling its cargo. Bow and stern pointing skyward, midships awash ... it's a sad picture to behold. Then, 12/7/2007 a second single hull tanker, Heidi Spirit, off Korea was struck by a loose barge and spilled its cargo. Virtually, back to back catastrophies and the spot market day rates went to $150,000 for dh shipping by mid- December 2007.
Now, with Korea contemplating criminal charges for the Heidi Spirit crew, despite their ship being the victim in the collision, many shippers won't hire single hull (SH) tankers. This means fewer tankers to move the crude from point A to point B. It gets worse, The ships burn bunker fuel which has steadily been increasing in cost. The shippers with fuel surcharges can not only reap the benefit of high spot day rates but they're covered on fuel costs. The shippers without those surcharges ... well? ... looks like they took a page out of the U.S. drive 55 when the U.S. reduced the nationwide speed limit during the "oil crisis" . Thats right ... they're reducing speed .... slowing down - which burns less fuel, but taking longer to deliver their crude cargo. The reported effect is: each knot in reduced speed means 10 - 20 fewer ships available ... More bad news ... the reduced speeds appear to causing port delays, loading/off loading, etc ... further reducing the pool of available ships. There is also the possibility of hoarding ... speculating that crude may hit +$150/bbl it appears Iran is using more than 10 vlcc's to store crude. The U.S. doesn't use Iranian crude ... well, other parts of the world do ... and if they're not getting Iran's crude ....
Fewer available ships to meet demand is great for shippers ... bad for us. The good news? new dh ships will be entering the market ... in mid-2009 It'll be a BONANZA year for record earnings for shipping companies ... if it does't kill the world ecomomy first.