By Apostolos Rompopoulos
Slump in oil revenue challenges Middle East oil exporters
The Covid-19 pandemic has had far-reaching consequences on the global capital markets. Despite the US government’s efforts for a quick and decisive response to Covid-19, unemployment rates rocketed to unprecedented figures. This was a key contributor to the near one-third shrinkage of the economy. Driving restrictions within the US and the decline in countrywide GDP have adversely affected gasoline and oil demand throughout the nation.
Being one of the most predominant global crude oil consumers, South Korea has seen its exports plummet to significant lows. This is likely to cause a nationwide recession which will further reduce global demand for oil. Chinese oil demand has gradually softened thus reducing the price per oil barrel in Asia. At the same time, derivative markets which add value to North Sea crude oil grades, are in a frail state.
The oil consumption outlook does not appear to be any better in Europe, with Finnish refiner Neste Oyj predicting that demand for oil products will remain “severely reduced” in the third quarter. Despite the recent historic deal between OPEC+ nations to cut global oil output, crude oil remains priced at around $40/barrel. Energy analyst C. Markits predicts an average price of $43/barrel for Brent in July; this figure may rise to $50 by December provided that oil demand will begin to recover. However, this is just one of many highly speculative scenarios.
The IMF argues that plunging crude prices coupled with global production cuts are expected to significantly affect oil exporters in the Middle East and North Africa. Combined oil income for these exporting regions is projected to decrease by $270 billion y-o-y from 2019. According to S&P Global Ratings, country members of the Gulf Cooperation Council are set to accumulate a combined $490 billion in government deficits between 2020 and 2023.
Responses to the economic shock
Saudi Arabia tripled its VAT in the past month in an effort to reverse the deficit and revive its economy. This is expected to reduce its deficit by $27 billion. At the same time, the government announced the suspension of cost-of-living allowances for its employees. Additionally, several governmental operational and capital expenditures will either be cancelled, extended, or postponed whereas major projects will materialize under strictly reduced provisions. Saudi Arabia plans to privatize state-held assets in healthcare, education and water utility sectors to raise additional funds. Saudi Finance Minister Mohammed Al-Jadaan argued at a Bloomberg forum that Arabian exporters could receive billions from such privatizations over the next five years.
Kuwait – which is one of the world’s wealthiest countries – is also facing a severe budget crunch. After having a running deficit that could reach 40 per cent of its economy this year, the Kuwaiti Finance Ministry is seeking permission from parliament to tap global debt markets for as much as $65 billion. However, Kuwait’s options are limited. The General Reserve Fund has been used aggressively in recent months. This has left its liquid assets in a vulnerable state and they could be further depleted within the current fiscal year, or by April 2021.
Stable- / Dry: Firm+)
With the exception of the Supramax sector the rest of the sizes enjoyed a week of firm activity with Capesize vessels outperforming their smaller counterparts. The BDI today (04/08/2020) closed at 1463 points, up by 78 points compared to Monday’s (03/08/2020) levels and increased by 199 points when compared to previous Tuesday’s closing (28/07/2020). The crude carrier market remained fairly constant with both VLCC and Suezmax sectors displaying no meaningful signs of increased sentiment while the Aframax market further declined compared to the previous week. Contrarily, Suezmax owners increased their respective market shares. The BDTI today (04/08/2020) closed at 506, decreased by 7 points and the BCTI at 353, a decrease of 9 points compared to previous Tuesday’s (28/07/2020) levels.
Sale & Purchase (Wet: Stable+ / Dry: Firm+)
Significant appetite across all different dry bulk sizes was recorded in the Secondhand market during the past week while the VLCC en bloc sale was the main highlight of the admittedly softer tanker SnP activity. In the tanker sector we had the sale of the “EAGLE MELBOURNE” (50,079dwt-blt ’11, Japan), which was sold to European buyers, for a price in the region of $16.0m. On the dry bulker side sector we had the sale of the “PACIFIC OAK” (203,212dwt-blt ’05, Japan), which was sold to Chinese owner, Seacon, for a price in the region of $14.7m.
Soft- / Dry: Soft-)
The recent newbuilding contracting activity concurs with the pace we have been observing during the past six months. Up to now, 2020 has proven to be one of the most challenging years for the shipbuilding industry, with hopes for a substantial recovery in newbuilding volumes remaining reserved for the foreseeable future. In addition to the uncertainty due to COVID-19 spread that is still making the headlines, the move towards ESG has caused divide among the shipping community. There is no clear-cut way in which shipowners and shipyards can start approaching the targets set out by the IMO and Poseidon Principles. The shipowner’s choice between ordering LNG-dual fuelled vessels over regular fuelled ones is daunting because the former is almost twice as expensive in terms of their initial capital expenditures. Similarly, shipyards are charged with having to choose to invest in and develop a plethora of new vessel types and technologies. In terms of recently reported deals, AW Shipping, a joint venture between ADNOC & Wanhua Chemical, placed an order for 3 firm two optional LPG vessels (86,000 dwt) at Jiangnan, in China for a price in the region of $73.0m each and delivery set in 2022.
Stable+ / Dry: Stable+ )
The Demolition market keeps offering high levels of return to owners willing to dispose of their units. Scrap prices across the Indian Sub-continent remain above $300/ltd with Pakistani breakers offering impressive numbers for yet another week – close to $360/ltd. Scrap prices have topped the $350/ltd benchmark. This displays the unequivocal confidence of Pakistani breakers that prices will increase further in the coming days. This past week, reported demolition sales remained soft which could be a reflection of the continued decrease in available tonnage candidates couple with the expected market slowdown due to Eid Holidays in Turkey, Pakistan and Bangladesh. Average prices in the different markets this week for tankers ranged between $185-340/ldt and those for dry bulk units between $180-330/ldt.