2020 was undoubtedly an unprecedented year for the shipping sector but China remained the ‘stabiliser’ among other giants in the oil market, writes Tradeviews research analyst Georgia Anastasiou
Demand influences output; this is an economic principle in trade, in order to achieve an equilibrium in the price. The pandemic caused a significant decrease in demand for oil. However, during March and April 2020, production was at very high levels, and here lies the paradox. Let us take a look at the facts that caused this confusion.
OPEC proposed to Russia, which is one of the biggest producers of oil, to deepen oil output cuts because demand had already dropped significantly. Then Russia declined and Saudi Arabia raised its output. The result was a significant surplus of crude oil and therefore a sharp drop of the oil prices. After negotiations, OPEC and major G20 producers agreed to implement unprecedented global oil supply cuts from 1 May to improve oil prices.
China was one of the only countries to play the oil market well. As illustrated in the diagram (China plays the oil price well), based on Tradeviews data, it exploited the collapse in oil prices by increasing imports of crude oil, especially from March until June as is clearly depicted, in the relationship between the imports and the oil price.
As the price fell, Chinese traders filled up silos, floating storage and fuel tanks. The sudden high demand caused a lag in landed volumes but traders continued doing the deals as prices rose which means China played it perfectly. This meant at a time when global volumes fell to most countries, China’s buying spree gave hope to tanker owners and contributed to rates going higher. China has a history of getting the commodity market right. In 2009, after the global financial crisis commodity prices fell when the world was in fear. That is when China doubled down.
No one can deny that since China increased global trade, it is aware of its strong position. Of course, its size and population explain this commercial flourishing, however China’s strategy proves to be particularly durable and effective. 2020 was not an exception.
The graph (Crude oil growth) shows that demand growth for crude oil was already slowing during the last five years. Due to the pandemic, 2020 was, as could easily be predicted, the worst year. The demand for crude oil fell sharply among major importers. China, although starting from a higher base, was still able to keep a positive percentage for its oil demand.
While we expect a post Covid-19 bounce back, longer-term pressures and the environmental agenda will speed up the transition away from fossil fuels. Environmental issues are at the forefront. Renewable resources and maritime alternative fuels seem to have picked up the reins sooner than was expected. How much will this diminish crude oil global trade, and to what extent? Time will tell, but what is certain is that the current oil crisis will leave an indelible mark on shipping.
In the years ahead, crude oil is still a major valuable commodity and the market and prices will move up and down, but China will probably still act instinctively against movements to bring equilibrium to the shipping market. However, alternative options are entering the game and this should not be ignored. Α new era for the tanker market is beginning to emerge. Who will be favoured this time? Probably the one who will adequately understand the changes.
Riviera will provide free technical and operational webinars in 2021. Sign up to attend on our events page