The offshore oil market

Oil — Queen of natural resources

Oil plays a fundamental role in the modern economy. The world consumes 100 million barrels of oil a day. The oil industry produces the equivalent of 2.5% of global GDP per year, 2.1 trillion USD – so much as the Italian economy. More than 1/3 of world primary energy production – i.e. energy directly from natural resources – comes from oil. As a major fuel source for land, air transport, it is like blood in the blood of the world economy. Oil prices affect the economy as one of the most important inflation factors. Oil is also a basic production factor for the chemical industry in producing a wide range of products: plastics, lubricants, asphalt, paraffin, etc. All of this together determines its role as not only raw material, but above all the macroeconomic factor.

Oil market – historical take

Oil has functioned as a strategic raw material for over a hundred years. Its importance grew steadily, largely due to the revolution in transport. In the 1950s, it replaced coal as a major fossil fuel. However, during the entire 1950s and 1960s, the oil price remained at around $3 per barrel (about $30 according to the modern dollar value, including inflation), contributing to the rapid development of the economy and consumption in the United States and Western Europe.

The 1970s and oil shocks 1973 and 1979 redefined the oil market. The economies of high-developed countries were then shaken by two oil shocks. In 1973, the Arab OPEC countries imposed an embargo of exports on Western countries – especially the United States – which supported Israel in the Jom Kippur War. This unprecedented action led to fuel shortages in the market and a steep rise in the price of a barrel of oil from US$3 to US$12 (from US$17 to US$61 today), pushing high industrialised countries into the most severe recession since the Great Depression. The next oil shock sparked the 1979 Islamic Revolution in Iran and the Iraqi-Iran War, undermining oil prices to nearly $40 (US$125 today). Fuel shocks have put an end to free oil consumption in developed countries. In 1990, Iraq's invasion of Kuwait and the Gulf War I again conquered the price to $39 ($76 today) per barrel. In the 1980s prices gradually declined as Western countries developed energy efficiency and alternative energy sources, reducing raw material consumption by nearly 10% over the decade. The 1990s is a period of certain price stability.

In the 2000s there was a sustained rise in oil value, driven by fast-growing emerging economies, especially China growing at around 10% of GDP per year. Between 2000 and 2008, Middle State oil consumption increased from 4.8 million to 7.7 million barrels a day. During the same period, global oil consumption increased from 76.5 million to 85 million barrels. The global increase in consumption was compounded by a decline in North Sea mining and political instability in the Gulf, Nigeria, Venezuela. In July 2008, the price of the barrel reached an historic maximum of $145 (151 USD today). However, the 2008 global financial crisis has reached a price of nearly 2/3. As early as 2009, the prices were reflected and remained stable by mid-2014, ranging between USD 80-110 per barrel, even despite the euro area crisis and the Arab Spring. However, in 2014-16, cumulative changes distorted the balance between supply and demand and caused up to 70% of the price. On the demand side, China's growth slowed down. But the key was the Copernican coup on the supply side: thanks to the shale revolution, the United States has again become a great oil producer. Establishing cooperation between OPEC and Russia's main competitor and joint production cuts led to partial loss recovery and price stabilisation in the range of $40-60.

The oil market for the SARS-CoV coronavirus pandemic- 2

The unprecedented demand-supply shock caused by the SARS-CoV-2 coronavirus pandemic has brought a historic crash to the oil market, beating oil prices to around $20 per barrel, i.e. the lowest ever taking into account inflation. Moreover, on Monday, April 20, WTI's oil price in May's future contracts dropped for the first time in the history of the market to a negative level – producers pay to get rid of oil stocks from warehouses.

The latest forecasts of the International Monetary Fund show a decline in global GDP of up to 3%. In terms of the oil market, the International Energy Agency expects oil consumption to fall by 7 million barrels a day, i.e. 10% of consumption.

However, announced by OPEC+ on 13 April, the unprecedented reduction of production during the May-June period by 9.7 million barrels per day and subsequent cuts in the horizon up to 2022, combined with even a limited overall economic reflection with the defreezing of economic activity, opens the way to a certain stabilisation of oil prices at a low level.

Current oil market turbulence should also not obscure the long-term perspective. However, the energy transformation towards LNG, RES and electromobility announces the decline of oil as the world's main energy source, its importance will remain in the coming decades. Authoritative for the energy industry BP Energy Outlook foresees two more decades of moderate oil growth, primarily stimulated by demographic and economic development of South Asia.

Oil market – industry take-up

The maritime industry is one of the most vulnerable to fluctuations in oil prices in the economic sectors. The oil market affects it on many levels and in a heterogeneous way.

The first is the volume of international trade, whose prosperity in the maritime transport industry is a derivative. The World Trade Organisation preliminarily estimates that it will fall by between 13% and 32% in 2020; compared, as a result of the 2008 global financial crisis, it has fallen by 9%. Despite such a dramatic decline, maritime transport operators are in a better position today. After the 2008 crisis, global consolidation of the industry took place and the surplus supply of tonnage has been reduced with a burden, so today shipowners are not forced to reduce freight rates as much as during the previous downturn.

Ship fuel prices account for 50-60% of operating costs, and oil prices reached up to 3⁄4 during the maxim period. The lower prices of marine fuel for oil prices are a relief for the shipping industry. This is all the more important as the increased sulphur monoxide emission limits in marine fuel introduced with the start of this year under the IMO 2020 agenda led to a large increase in fuel demand based on less frequent light oil, i.e. low sulphurisation, and an increase in its price from around USD 250 per tonne in 2015 to around USD 600 at the end of 2019. And the current situation in the oil market in the long term will not affect the IMO's efforts to introduce further environmental standards Parallelly into the Paris Agreement or the trend towards eco-modernisation in the maritime transport industry – although it is increasingly likely to delay their implementation.

Nearly half of the world's oil is transported by sea. Although the sharp decline in demand for oil should pull the freight rates of tankers down, this time it happened differently. Recorded low oil prices combined with overproduction have made it more profitable for producers to store it pending an improvement in the economy than to sell it. As a result, in recent weeks, freight rates rented for this purpose have skyrocketed to around US$300,000 per day, becoming a major factor in maintaining a high economic index in the shipping industry of ClarkSea Index despite the deconiture in other segments of the maritime transport market associated with the freezing of demand for raw materials and the stopping of production in China. Currently the freight price stabilises at around $170,000 per day. In conditions of oversupply of oil estimated at close to 15 million barrels a day and rapidly filling storage capacity, tankers will continue to benefit from the situation for weeks. On the other hand, with a sharp decline in demand for oil, there is a threat of deconicturity before this segment, which will not compensate for current oil storage gains.

From the perspective of the shipbuilding industry, the impact of oil prices on the segment is very important offshore – construction and repair of drilling platforms for offshore operations and ships to operate them. Its importance has been growing dynamically since the 2000s. Sector offshore is responsible for nearly 30% of global oil production. Due to oversupply of raw material, global investment in the sector offshore It has steadily fallen since the record year 2014, in which it reached the USD 350 billion. In January this year, the energy industry's research company Rystad Energy expected a new investment cycle in the sector to come. offshore together with 2021, but the collapse in the oil market puts questionable optimistic forecasts in the medium term. However, in the long term, investments in the sector offshore will be necessary to maintain production capacity as well as new dynamics will give it a dynamic development of offshore wind energy.

Source: MGMIŚ, Ship Industry Department