The tanker market could face headwinds from the dollar’s strength and the effect this can have on oil demand. In its latest weekly report, shipbroker Gibson said that “as the oil market contends with growing supply tightness until at least the end of 2023, macroeconomic headwinds are also at play. Central bank monetary policy is weighing on the oil demand outlook, with the US Federal Reserve signaling the potential for keeping interest rates higher for longer than some economists had initially expected to get a grip of inflationary pressure. This is likely to be bearish for both oil and tanker demand as higher US interest rates support a stronger US dollar, which in turn makes dollar-denominated barrels more expensive for non-US buyers, ultimately impacting demand. This could have knock-on effects on the tanker market as the oil market adapts. The shale industry is another victim of high interest rates, with their spending constrained by investor payouts”.
Source: Gibson Shipbrokers
According to Gibson, “firstly, another rate hike is expected from the US Federal Reserve, as despite inflation decreasing from around 9% in 2022 to the most recent inflation reading of 3.7%, it is still above the central bank’s 2% target. This has indicated to policy makers that the current tightening cycle is working after raising rates by 5.25% over the last 18 months. At last month’s Fed meeting, it was decided to keep rates unchanged, although current consensus seems to indicate at least one more increase in 2023 with a period of holding higher future rate to give it time to feed through into the broader economy and finally get to the 2% inflation target. While we are likely to see further appreciation in the US dollar, softening oil demand somewhat further”.
The shipbroker added that “the ongoing tightening cycle, combined with a deteriorating oil supply outlook and projected growth in oil demand could set the stage for even further rate hikes, if higher oil prices feed into the broader economy and reignite inflationary pressure. In this case, central bankers may be forced to keep increasing interest rates into next year, prolonging market concerns, although there appears to be little appetite for this at present. The other issue persistent higher interest rates pose is the potential to disincentivize holding inventory at a time when commercial stockpiles are already under pressure as higher interest rates lead to increased storage costs, which during a period of a backwardated pricing makes storage commercially unviable for traders as we head into winter. The combination of elevated interest rates and steep backwardation also makes long-haul crude shipments less attractive”.
Meanwhile, “for the tanker market, such a scenario could limit the upside in tanker earnings, if we start to see crude demand trend down from interest rate policy in addition to lower cargo availability, following the recent OPEC+ output cuts. However, there is likely to be a time lag in between further hawkish rate decisions and the consequences for the oil and tanker markets. Yet again, the general medium-term outlook for tanker earnings remains favourable, even if there are some short-term headwinds. While there could be some impact from tighter monetary policy on the market, the underlying tanker market fundamentals particularly from a fleet supply perspective may limit any downside pressure on earnings. Likewise, an improved oil supply outlook into next year cannot be ruled out, which would provide additional support for the tanker market. However, much depends on macroeconomics and here the Fed rate policy has a role to play as well”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide