Violent fall in oil price adds to volatility in logistics

The fall in the oil price overnight (09-Mar) was quite significant. West Texas Intermediate fell from around $40 on Friday, 06-Mar, to an opening price of $32 late on Sunday/Monday, 09/10-Mar. Brent blend fell from $45 to $36.60. These are some of the largest price falls for a decade.

The immediate reason for the drop was a statement by the Saudi Arabian government that they would commence “unrestricted” oil production. The Saudi’s had met with the Russian government on Friday to discuss production targets, with both sides hoping to agree measures that would drive-up the oil price. Whatever happened in the meeting, the Saudi’s have now said they will reverse their policy and are looking to gain market share at the cost of producers with a higher cost-base such as Russia.

The politics of energy are complex, however the fall highlights an underlying surfeit of production capacity. This has been the case since the US shale producers began to seriously enter the market more than ten years ago and this has undermined the position of what is called ‘OPEC+’, representing the traditional Middle Eastern producers combined with Russia.

What has accentuated the decline is the combination of the promise of an increase in production combined with a decrease in demand as a result of the COVID-19 coronavirus outbreak.

This is good news for the logistics sector. Lower prices for bunker-fuel have already supported profitability in the container shipping sector even as demand weakened towards the end of 2019. This dramatic fall will ease the pain at least of the larger container shipping lines, although it may be too little to help the medium-sized and smaller carriers in Asia Pacific hit by the sharp fall in trade.

Airfreight is a more complex picture. UPS, FedEx and DHL Express are likely to be significant beneficiaries, something amplified by the speed of the fall facilitating a greater delay until the new price is passed on to their major customers. The passenger airlines are in a different position, experiencing such a sharp contraction in the business that lower fuel prices may be of only minor importance. Market segments such as road freight have been less affected by the disease-driven fall in demand, however their cost profile is less directly dependent on the price of oil.

The underlying trend seems to point towards low oil prices in the short-term, however caution should be exercised. This fall in price is the result of negotiations between Russia and Saudi Arabia and therefore could be reversed quite quickly. Similarly, the COVID-19 coronavirus crisis may also end abruptly resulting in a sharp rebound in demand. The combination of the two could be destabilising. The most likely short-term prospect in logistics markets is one of quite strong volatility.

Source: Transport Intelligence, March 10, 2020

Author: Thomas Cullen