The new global threat from the omicron variant is being layered on top of existing fallout from delta-variant outbreaks in Europe and Asia, reports American Shipper.
Tanker spot rates
The immediate effect of omicron is a slowdown in international travel as countries halt flights.
The loss of jet-fuel demand amid the pandemic has been a major negative for tanker shipping demand, as have refineries’ use of inventories as opposed to new supply, and production cuts by OPEC+. Anything that slows a full recovery of jet-fuel demand is bad for tankers.
The spread of the delta variant was already impacting fuel consumption in Europe and Asia before the omicron scare. Austria went into a full lockdown last week, Germany is poised for restrictions, and a delta outbreak continues to curb movements in China. According to Evercore ISI China analyst Donald Straszheim, “New cases have been found in Shanghai, Zhejiang and Jiangsu — economically important provinces. Defensive steps are already underway.”
According to Nolan, “A rise in travel restrictions and quarantining is not good for oil consumption and tanker demand. There is no silver lining or sugar coating.”
OPEC+
OPEC+ is meeting this week on planned easing of production cuts. The Joint Technical Committee meeting was pushed back from Monday to Wednesday to allow more time to weigh the omicron effect. OPEC+ will make its decision on Thursday.
If OPEC+ slows resumption of production in response to omicron, that’s another negative for crude-tanker rates.
Lars Barstad, CEO of crude and product tanker owner Frontline, said on Monday’s conference call with analysts, “Demand and supply of oil continue to rise, but the latest virus variant is obviously now clouding the outlook.” He added, “With regards to the production increase, I think that’s riskier now, whether OPEC actually will increase volumes into Q1.”
Container spot freight rates
As tanker shipping has been suffering a historic depression during most of the COVID era, container shipping has boomed.
Despite a moderate drop-off from the all-time highs reached in September, container freight spot rates have held steady throughout November and even nudged back up again over the past week. The Drewry global composite index is currently 6.7 times where it stood in late November 2019, pre-COVID.
The guessing game on when rates will truly plunge just got even harder. Stefan Verberckmoes, shipping analyst and Europe editor at Alphaliner, told American Shipper, “The pandemic has made it extremely difficult for carriers and analysts to look into the future. Omicron is likely to extend the period of little-to-zero visibility in the liner shipping sector.”
COVID had a negative effect on container shipping demand when production areas such as China or consumption areas such as the U.S. and Europe were locked down. Beyond that, the COVID effect on container shipping rates has been highly positive, due to the shift in consumption from services to goods, compounded by port congestion.
“The second aspect is on demand, especially in the U.S. where the pandemic has pushed a shift from service spending to spending on goods. This is a key reason for the demand boom in container volumes to the U.S. If the omicron [variant] extends the pandemic period, this will keep the boom running.”
Clarksons Platou Securities said Monday: “With omicron now causing more restrictive travel measures, consumer spending habits may remain engaged in the favor of the container shipping sector. Several liners had already taken a view that strong market conditions will persist into 2022, and this could be extended further … [with] a potentially longer run.”
The caveat is that U.S. consumers may not have as much to spend on goods in 2022 as they did in 2021.
On Monday, Deutsche Bank transportation analyst Amit Mehrotra downgraded UPS , railway Canadian Pacific and trucking company Saia to “hold” in conjunction with his team’s 2022 outlook. That outlook warned, “The easy monetary and generous fiscal policies that have propelled consumer wealth and spending to all-time highs are now largely in the rear-view mirror.”
Other shipping segments
“Generally, the areas with the least direct impact have been dry bulk and gas shipping,” said Stifel’s Nolan, referring to broader consequences to shipping from COVID, and by extension, from omicron.
Dry bulk has had its best year in over a decade in 2021, while spot shipping rates for liquefied natural gas carriers are now at all-time highs.
The biggest pandemic effect on dry bulk has been congestion in Chinese unloading ports driven by COVID precautions and restrictions at terminals. That congestion has tied up bulkers at anchor, a plus for rates.
Asked about potential fallout from omicron, Nick Ristic, lead dry cargo analyst at Braemar ACM Shipbroking, told American Shipper, “For now everybody seems to be taking a wait-and-see approach. The one place where significant pandemic-related measures can significantly tighten the [dry bulk] market — China — is already pursuing a zero-COVID strategy, so it’s hard to imagine more disruption from congestion and quarantines.”
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: American Shipper
