Oil Special – the year in review and what can we expect in the future

Freight up.

Hello and welcome back to freight up, the freight and quality podcast of freight investor services.

My name is Jess and together with Davidate we'll be your hosts as we navigate our major freight and bulk commodity markets.

We have a bit of a special episode as we look at one commodity which has been on the headlines quite a lot recently, and we are of.

Course talking about oil.

Hi Everybody, from me as well.

But don't worry, we won't be talking only about oil as we will get a regular update on dry freight with Benkleng from our Copenhagen office and Aopay will tell us more about what is happening in China and the latest news on the iron ore.

But as usual, let's first look at the latest news and the index movements of the last two weeks.

The us economy grew at an annualized rate of 3% in the second quarter of this year, unchanged from the second estimate and above an upwardly revised 1.6% expansion in the first quarter.

Particularly positive the non farm payrolls number as the US added 254,000 jobs in September 2024, much higher than an upwardly revised 159,000 in August.

The market forecast was one hundred forty k.

The american unemployment rate fell to 4.1% in September, lowest in three months, down from 4.2% the previous month.

In Asia, the Keishin China general manufacturing PMI fell to 49.3 in September from August 50.4, missing markets forecast of 50.5 and pointing to the lowest level since July 2023.

In Japan, the Bank of Japan's index for the big manufacturer sentiment stood at 13 in the q three of 2024, and this was unchanged for the second straight period, also in line with market expectations.

Positive the consumer confidence index in Japan, which increased to 36.9 in September from August 36.7.

The number was, however, below market forecast of 37.1.

Now what about the market movements of the last two weeks?

Let's take a quick look on the capes front.

The C five TC took a bit of an up and down as it gained considerable ground on the 1 October at $29, 299 and has lost over five k, reaching $24,786 yesterday.

The P five DC instead has lost ground during the past two weeks as it started at $14,039 and traded down to $12,969 yesterday.

The S ten Tc has traded in a $500 range as yesterday was at $13,938 and on the 24 September at 14,553.

Even a narrower range for the handy as the HS 70 C went slightly up $100 from twelve thousand seven hundred ninety five dollars to twelve thousand nine hundred and eleven dollars yesterday.

Iron ore has gained considerable ground, going from $94.60 two weeks ago to $108 on the 1 October, moderating slightly to $104.65 yesterday.

And regarding fuel oil, we'll chat about that later on.

Now let's talk about drive freight with Ben Klang.

Hi Ben, could you please talk me through the dry FFA market movements for the last week?

Yes.

Hi Jeff, with pleasure on the cavesize market experience.

Some continued downwards momentum throughout last week.

On Monday last week, fresh stimulus from the chinese central bank along with positive response in iron ore and rebar prices trickled in to the dry freight market.

This sentiment helped capesize contract test recent highs in a high volume session, with Q four trading up to 29,250 and November reaching 28,850.

However, with the arrival of Tuesday and the start of Golden Week last week, conditions began to soften in both the Atlantic and the Pacific basin.

Capesize rates were under pressure with October dropping sharply to 29,500, down $2,000.

This sell off accelerated into Wednesday.

The index plunged by $1,042 to 28,187 and October was seen trading at 28,750 and 26,750 for November.

By Friday, October gradually pushed up to 28,750.

By the afternoon, November saw significant trading at 27,250, rounding the week with notable volume but minimal day to day movements.

And then if we look at the Panamax market, there were actually no profound changes.

The market experienced decline in the first half of the week before rebounding slightly by Friday, closing just above Monday's opening levels.

Last week began with the market traded with a narrow inter day range of approximately $300, with October around 13,350 and November at 14,100.

However, as the weaker Cape market and the effects of golden Week weighted on the sentiment, rates drifted lower by mid week, with October dropping to 12,300 and November to 13,300, while Q four fell to 13,000.

By Thursday, the index edged back into positive territory, up 28 to 10,999, leading to reduced selling pressure towards the week's end.

By Friday, October had recovered to 1350.

November found resistance at 14,100 and and Q four traded up to 3600.

The supermax sector faced a rather challenging week marked by kind of limited overall movement.

After a sluggish start on Monday and Tuesday last week, the market managed to recoup its losses towards the latter half of the week.

Early bid support on Monday resulted in a narrow intraday range, with October closing at 14 600.

The same level did open at the with both the atlantic and Pacific regions facing downwards pressure on Tuesday, prompt rates declined, pushing the October and November down to 14,200 by Friday.

However, some front month bid support emerged with October trading up to 14 650 in November to 48, while Cal 25 traded up to 13 100.

Overall, it was a low liquidity week for the super max with minimal price movements.

Thanks Ben.

And next we have Hao Pei, our senior analyst from our Shanghai office.

Hao, how are you doing today?

I'm doing fantastic.

How are you Davido not to vet, not to vet.

So it seems that iron ore was a little bit on a rollercoaster on Tuesday.

We had a high opening and then we followed with a very low close.

Can you tell us a little bit more about what happened as we saw.

The major commodities saw a high open after China long holiday which was just line up with the strong overseas commodities and strong equities performance.

Then there was taking gains from China equities after a near 40% of growth just over the previous six trading days.

And it is historical speculative in any of the market in any of the times.

And those taking gains mean a correction on iron ore as well.

And we think iron ore will be continuously impacted if macro market saw more volatility at news flow into the following weeks.

And so the uptick in correction during early week has nothing to do with fundamental market.

If there is continuous like news on monetary policies or China stimulus there will be something we can look into it.

It will have a huge impact on Alan or in the following weeks.

I see you have mentioned the fundamental side.

Has there been any change in the fundamental markets at all in September and now in the first days of October?

I think iron ore there are a lot of change on the fundamental market from iron ore side.

The early September I think the port inventories for example which once reached a year high at 154 million tons and it's dropping by like 40 million tons from the past three weeks.

And port stocks shipped to mills but the mills inventories were also dropped in a very high speed.

So we saw 3.7 up a steel production versus a 3.7 a decrease on inventories at the same time which means both supply and demand are improving at the same time.

So normally means a fast usage of iron ore and for physical coke in China in September and early October which up by 500 to 650 yuan per ton and at the same time the fob market of coking coal which is a little bit tight for the nearby lichens and I reckon we start to reverse our market review from slight bearish to neutral by mid summer, mid September and we started bullish two weeks ahead of China holiday.

And I think the delivery played a slight bearish indicator for iron ore market as there is no sign on a shipment decrease for iron ore through entire q four with good weather and good production and good logistics and everything good.

And as well, the mid grade domestic concentrates are something the market are worrying about because there are too much competitive brands versus the traditional ore brands which have high cost effectiveness which resist the iron ore growth in a mid run.

That's why iron ore actually stopped growth even during the holiday versus the other strong growth of like coper and zinc.

And in future, I think the low of iron ore should be definitely about $85, although it's corrected by like $10 or more over the past two days and then through q four.

However, the high was also limited.

Unless marginal demand or new demand come in and we have, unless we see the real numbers on the improving of demand or something, new projects happen.

Otherwise, I think it's going to be traded in a narrow range compared to other of the commodities.

We have now.

In the booth with us, Ricky Forman and Archie Smith.

Gent, thanks for joining us.

It's been a year now since the beginning of the escalation of the tensions in the Middle east, and this, of course, had an impact on the oil prices.

As a reference, the Brent crude 52 week range has been sixty eight dollars, sixty eight cents to ninety three dollars seventy nine cents.

In your opinion, what are the key moments?

What were the key moments or events that mostly contributed to the ups and downs of the year?

I think the sort of obvious one, and actually where we hit that range higher that you mentioned earlier was around this time last year after the initial Hamas attack in Israel.

Thats when we saw Brent spikes at that 93 level above 90.

Briefly.

Obviously, that was just the immediate reaction from a scared market with regards to oil supply worries.

That being said, Israel Gaza are not massive oil supplying nations.

However, they are surrounded by some more serious oil powers.

I think people were more worried about the involvement of those sort of powers with regards to oil supply.

Yeah, and I think that's a very good point that Archie makes there.

I think the sentiment in the market was there was definitely a concern that there could be an overspill and an escalation with the war in the Middle east.

And obviously, the point that we're at today, I think, is what was initially feared a year ago, where it has obviously spread out just from the Gaza region into a much wider field.

And obviously that then has a psychological as well as a practical implication on the potential supplies of the oil.

So that was where we saw that peak.

And then as we progressed nearer to the end of 2023, it started to slide back off again.

The sort of war risk premium was very much priced in, and with no sort of further serious escalations, things started to cool back off.

And another thing that sort of started coming back into the minds of market participants was the non compliance with OPEC cuts.

I think there was a lot of sort of proof that a lot of the OPEC nations, particularly the smaller ones, so basically not saudi or Russia, were not sticking to their output cut quotas, basically implying that there was more physical flow in the market.

So fears of oversupply obviously pinned with pretty weak global demand.

There was oversupply fears and, yeah, the prices started to slide back off again, then sort of q one through Q 224.

It was pretty sideways, wasn't it, Rick?

It was pretty boring.

Range bound?

Yeah, there was not much excitement, I think.

Yeah, it was very much limbo again between is there going to be escalation in the Middle east?

And that was sort of your supportive side, and then the downward pressure was just really weak.

Chinese economy.

All the data points that were coming out weekly, monthly were pretty negative for China.

And when Chinas economy is, id say crude demand is pretty tied with chinese economy.

Yeah.

And I think that we certainly started to feel that there was a fundamental shift in what the market was looking at early on.

There was a big focus on the war in the Middle east.

And then obviously, as we progressed through the year, as Archie has just said, the data points and the weaker economic factors, I think both from China and the US started rumors in the market.

Is the US going to start going into a recession?

What's going to be happening with the OPEC cuts?

Are they going to extend this certainly into the Q four period of this year?

So the focus from the market really did just shift and move across from the panic and the concern of everything spiking to essentially more of a macro fundamental and economical point of view saying, okay, well, this is actually looking a little bit weaker now.

And I think that was the main driver for the prices coming down.

Yeah, no, 100%.

And that kind of segues us nicely into Q three, when we really started to see some softness after a four or five month period of very range bound prices.

Q three is when we actually saw some movements breaking the range.

And again, it was off the back of chinese data.

They had really weak crude import data, production data, macro data, and that really acted as a spearhead for prices to break that range they had previously been in, and really slide off into Q three, and it sort of carried on going that way, leveled out a little bit, and then we get to sort of mid August September, and that's going back to your range that you mentioned at the start of the podcast.

Mid August September period is when we really crashed and saw the crude go below that 70 70 mark into like the $68 per barrel.

There was a few things going on.

I think ceasefire talks at the time were looking promising between Israel, Hamas.

There was still worries of oversupply.

At this point in time, OPEC had not pulled back their supply increase plan, so they had introduced a plan.

They were going to start trickling supply back into the market from Q four.

This, as we speak, has been delayed a couple of months, but at this point, when we really got to that bottom of the 52 week range, this hadnt happened.

There was all this weak demand, demand, potentially a resolution in the Middle east, as well as OPEC supply returning.

So we really, really saw the crude come off, and that was sort of the first big move that we'd seen in a while.

Obviously, this OPEC overhang into the Q four period was very much in the back of the market's mind, which is why then, obviously they've made the announcement to delay such measures until December.

Interestingly enough, as well, the Chinese also changed their tax implications on imported oil, whereas in the past, and I think this came into effect on the 1 October.

So it's very recent.

But essentially this has a big impact on the independent refineries, which are essentially bracing themselves for the potential feedstock shortage in the fourth quarter, basically because they're nearing the end of their crude import quota utilizations as well.

And for those that aren't aware, obviously the teapots, the independent refineries, would in the past normally receive around a 95% tax rebate from the government on such imports.

But I think the implementation of this tax change, whereby they can only claim back maybe around 60% of rebate, is also kind of another indication of the concern from the chinese demand side of things.

So this indirectly will mean that the Chinese will be producing much less because the refineries are not being incentivized as much via the tax rebates.

Yeah, 100%.

That's a really good point with Rick.

Something else that I've going to go back with that I forgot to mention is in that same period, the sort of end of August beginning September, some of the listeners may remember the equity market really, really took a massive hit.

And that was another thing that was playing on that falling crude down to that 68 level.

Yeah, it was a driving force, wasn't it?

100%.

Yeah, yeah, 100%.

Yeah.

My pa took quite a hit itself, actually.

And then now, Rick, obviously we're seeing it spike back up again as we come to present day.

As you mentioned earlier, actually, we're now at that point where we were worried about last year.

Is this conflict going to escalate?

It seems like we're living that now.

Obviously there's sort of boots on the ground in a few surrounding countries, retaliations from Iran, involvement from us, and that's really driven prices in the last couple of weeks, ten days.

Yeah, absolutely.

And with all of these things, none of us are experts in these fields.

Right.

So where the resolution comes from and what that timeline might be, it's kind of finger in the air stuff no one knows.

And, you know, the reality is it's just an ongoing tragedy, I think, to throw into the mix as well.

We have the us elections coming up.

Obviously whoever gets in power there, foreign policy might dictate a slight different course of action with events in the Middle east.

But for now, certainly from an outsider's point of view, it doesn't seem like there's going to be much getting in the way of that event, regardless of who gets into power in the US.

It's just not a very good situation.

Let's now focus on the production.

One of the latest news about oil has been that Libya is restarting its production after it has been shut since August.

Saudi Arabia also made the news as it seems to be ready to abandon an unofficial price target of dollar 100 a barrel for crude.

And this has been read as a hint that the country is fundamentally ok with lower oil prices.

We also have the OPEC production cuts which have failed to sustain prices.

So, gentlemen, what kind of end of 2024 or beginning of 2025 can we expect?

Yeah, all sort of very valid points.

The libyan production has certainly been sort of at the forefront of the all news for the last month or so, definitely offering support when prices may have been falling.

And as you mentioned, the OPEC supply increases that they were planning when they were announced that this was getting pushed back a couple of months.

I think the market very much shrugged it off.

I do find when there's bigger things at hold, for example, conflict and weak global economy, you do find that some OPEC decisions that are announced, yes, they might have an immediate reaction in the market.

But on more of a long course, the market does seem to shrug most of these off, whether its bullish or bearish, particularly in the last two years that ive been in the fuel market.

That does seem to be the case.

Yeah, I think they fall down the list of priorities when they just dont carry as much weight.

When you have those other factors that are in play at that point in time.

Obviously when if those factors aren't in play at the time then they climb up the priority list.

But it's something that we always need to be aware of.

The market always factors it in and obviously something that we keep an eye on.

Yeah, something actually that you didn't mention in the question that has definitely contributed to some of the short term supply support to prices is the weather in the US Gulf coast.

It was hit with a few hurricanes too in the last couple of weeks and now they're gearing up for a third.

That's meant to be pretty heavy from what I've heard.

I don't know how accurate it is, but the news said it was meant to be like the strongest hurricane in the area in the last century or something like that.

So I mean already I know Chevron have closed one of their rigs and obviously with the previous hurricanes, I know there was a few majors, BP, Shell, Chevron that brought offshore workers back on land, closed rigs again.

These hurricanes, they come and go, they pass, but in the short term it's definitely supporting crude prices.

Yeah, exactly.

It has an impact.

And again, I mean, just watching something on the news last night, one of the actual weather reporters actually choked up and started crying because of the severity of this storm that they're expecting to hit land within the next couple of days.

So it does seem like it's going to be a major event.

I mean, a couple hundred people just from the hurricane two weeks ago obviously passed away, unfortunately, and that storm doesn't seem to be anywhere near as bad as the one that's going to be hitting the shore.

So yeah, it's something that we're going to have to keep an eye on.

I had a look at some of the recent prices on our FIS live app which shows all the main fuel oil pricing and it's regularly updated from your desk and the many others here at FIS.

And I've noticed a bit of a movement recently, especially when it comes to the high sulfur east west spread.

So maybe you can tell us a little bit more about what are the drivers behind these changes.

Yeah, so obviously we've seen quite a lot of volatility on the high sulfur east west spread over the last few weeks.

And again, if we look at the fundamentals behind that, I think one of the main drivers is the weak demand and the weak concerns of China.

There seems to have been, I wouldn't say China hasn't been awash with oil, but obviously the economic concerns have obviously put a negative sentiment on the market, and this has essentially been reflected in the east west spread coming off.

I'd say we don't normally see that spread in negative territory.

I mean, obviously it does happen, but it is more of a rarity than of a norm.

And it has traded down to, I think, -30 is that right?

In the front month?

Yeah, in the front month.

And again, I think it's been twofold.

So we've had the weakness out in Asia and China, but obviously reports from some of our clients as well have been talking about the limited stocks and supplies that have been in the european area as well.

So obviously, when you combine those two points together, weakness in Asia, strength in Europe, you know, it's really forced, it's really pushed that spread out temporarily.

It rebounded a little bit.

But obviously today in October, well, November is minus 9.

October is October.

Exactly.

I mean, October is still back in, I think in the minus higher 20 odds.

Obviously, the price at the front month that we price is the November, but it is still trading with the, with Europe to a premium to Asia, which like I said, is quite unusual.

Yeah.

Just sort of going off of what Rick said, I think when it initially really crashed deep into the negative territory.

Yes, I think China was very much a driver of that.

But at the same time, we did hear from a few people in the market that there was actually a few kind of physical oil majors that hadn't received cargoes or cargoes were delayed in north west Europe area, which again supported that high sulfur european fuel oil against the singaporean high sulfur fuel oil.

And, yeah, look, while that's not probably still a factor, it definitely helped to start the snowball.

Gentlemen, it has been a pleasure to have you in the booth today.

It's been a very interesting discussion.

I think we should do that again soon.

So thank you very much.

And that's it for this week.

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Freight up.