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Last Updated: June 16, 2016
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Shipping
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Shipping is a curious industry. It is a marketplace where massive deals concerning the movement of millions of barrels of oil on behemoth ships can be made over a third pint of Peroni at the local pub. Entertaining clients can be just as important as providing them with a great service.

It is a small world, where faces are remembered, grudges are engraved in stone and favors are easily called upon. It is personal and as such it requires you to wear your best “game face” at all times. And every two years, you can give your trusty business mask the ultimate test at the biggest and fanciest shipping masquerade – Posidonia week in sunny Athens.

“Posidonia” has become a special word for shipping people over the years and for good reason. It is a massive event, with two sides to it.

The first is a biennial international shipping exhibition, which started back in 1969 under the patronage of Greek shipowners and has grown dramatically since. This year it attracted 22,000 people with 1,800 exhibitors from 90 countries.

The other side is the fancy late night parties, mostly concentrated in the seaside town of Vouliagmeni, just south of Athens, which is perfect for this as it boasts amazing, sleek venues and locales.

Suited, booted, armed with business cards and aspirin, thousands of shipping professionals from around the globe attend these parties. They throw back a few drinks, shake some hands, slap some backs and, quoting Jay Z, re-introduce themselves. And that is where the game face masks really come into play.

When you navigate through a busy 5-star hotel seaside terrace splashed in the evening sun, you can see the masquerade in all its glory.

Here are some shipbrokers, usually wearing the faces of wolves and foxes. They emit an image of vigor, cunning and confidence, all the things that clients would expect from their brokers. You can usually find them in groups around their principals, like chartering managers from oil majors, commodity trading houses or shipowner companies.

Principals themselves are often comfortable under the masks of bears and lions. Powerful, somewhat calm and, well, important.

However, if you get to know these people, ask them the right questions, you may sometimes see the strain, gritted teeth, nervous eyes and sad smiles beneath the masks.

Some of that is usual stuff. Like a young broker, who has to switch his markets along with changes in the company, losing some accounts that he worked so hard for, unsure if he has enough energy to do it all over again.

Or an owner’s freight trader, who recently missed a big spike in his market, costing his company a few million dollars and under his bear mask hiding the fear that he cannot afford any more mistakes.

Another shipbroker, who after getting a big principal’s job suddenly found that people who wouldn’t shake his hand before are now throwing rose petals at his feet, standing in line to be his new best friend.

Even a charterer, who understands that shipbrokers that treat him like a king, send him cases of wine, get him the best football game seats, still make much more money than he does and would never call him again if he left the industry.

Still, some things were unique at Posidonia 2016. There is a lot of pain and uncertainty in the shipping market. The dry bulk sector in particular is going through probably its worst depression in three decades.

The oversupply of tonnage and limping commodity demand are steadily squeezing the life out of it. So, it is often hard for shipowners involved in this business to stay positive or come up with good reasons for optimism as there are so few to be found.

That’s why, leaning on a bar, in a sea of wolves and foxes, some of them can’t help but wonder if they will have this job in two years’ time when the next Posidonia event comes along.

Yes, there is a view that the situation may get better by then as the investment in tonnage goes down, giving hope to slowing vessel supply, but such opinions have often been wrong before.

Things are not so rosy in tankers either. The crude oil glut that made this market a superstar in 2014 and 2015 is shrinking. At the same time, there is a flotilla of newbuilding vessels due to hit the water in the next two years, boosting supply and thus pressuring freight rates down again.

And all this reflects on Posidonia guests too.

As veterans of the event told me, there were far fewer parties this year where the bar would be open past midnight. Many of the guests, including some top brokers, shipowners and charterers had to share rooms in order to afford staying at the top Vouliagmeni hotels where all the action was.

However, the beauty of shipping is that despite downturns, troubles and bad omens, the show still goes on. Simply because there are so many truly dedicated people who love, live and breathe this business.

That’s why I could see so many of them at the Posidonia parties, taking a step away from a bar to send that charterparty from their smartphone, share a rumor on a fixture they just heard from a client or just check their stem programs or position lists. For them, a game face mask is second skin, even if the makeup may be flaking sometimes.

And so there I was too, on a Thursday night, at the final big party of this over-the-top Posidonia week. With some effort I squeezed through a thick crowd of men in suits and ladies in fancy cocktail dresses.

The gorgeous Balux Café in Vouliagmeni is so packed that it required precise powers of agility not to spill my gin and tonic over someone’s tie or to inadvertently shove a fellow guest into a massive seaside pool.

I finally make it to the other side in an attempt to cool off in the warm Mediterranean breeze. I am out of business cards, my meeting schedule is complete and my plane leaves for London tomorrow.

And as I finally relaxed and took a final sip, I could feel the mask slipping from my own face.

By Alex Younevitch, Managing editor

Dry Bulk Dry Freight Freight Shipbrokers Shipowners Shipping Tankers Transportation Vessels
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Ecuador Exits OPEC

Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.

The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can. 

This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.

The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.

The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis. 

Current OPEC membership:

  • Middle East: Iran, Iraq, Kuwait, Saudi Arabia, UAE
  • Africa: Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of Congo
  • Latin America: Venezuela
  • Total: 13
  • Withdrawing: Ecuador (January 2020)
  • Membership under consideration: Sudan (October 2015)
October, 18 2019
U.S. Federal Gulf of Mexico crude oil production to continue to set records through 2020

U.S. crude oil production in the U.S. Federal Gulf of Mexico (GOM) averaged 1.8 million barrels per day (b/d) in 2018, setting a new annual record. The U.S. Energy Information Administration (EIA) expects oil production in the GOM to set new production records in 2019 and in 2020, even after accounting for shut-ins related to Hurricane Barry in July 2019 and including forecasted adjustments for hurricane-related shut-ins for the remainder of 2019 and for 2020.

Based on EIA’s latest Short-Term Energy Outlook’s (STEO) expected production levels at new and existing fields, annual crude oil production in the GOM will increase to an average of 1.9 million b/d in 2019 and 2.0 million b/d in 2020. However, even with this level of growth, projected GOM crude oil production will account for a smaller share of the U.S. total. EIA expects the GOM to account for 15% of total U.S. crude oil production in 2019 and in 2020, compared with 23% of total U.S. crude oil production in 2011, as onshore production growth continues to outpace offshore production growth.

In 2019, crude oil production in the GOM fell from 1.9 million b/d in June to 1.6 million b/d in July because some production platforms were evacuated in anticipation of Hurricane Barry. This disruption was resolved relatively quickly, and no disruptions caused by Hurricane Barry remain. Although final data are not yet available, EIA estimates GOM crude oil production reached 2.0 million b/d in August 2019.

Producers expect eight new projects to come online in 2019 and four more in 2020. EIA expects these projects to contribute about 44,000 b/d in 2019 and about 190,000 b/d in 2020 as projects ramp up production. Uncertainties in oil markets affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.

anticipated deepwater Federal Gulf of Mexico field starts

Source: Rystad Energy

Because of the amount of time needed to discover and develop large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than onshore production in the Lower 48 states. In 2015 and early 2016, decreasing profit margins and reduced expectations for a quick oil price recovery prompted many GOM operators to reconsider future exploration spending and to restructure or delay drilling rig contracts, causing average monthly rig counts to decline through 2018.

Brent crude oil price and U.S. Gulf of Mexico rig count

Source: U.S. Energy Information Administration, Thompson Reuters, Baker Hughes

Crude oil price increases in 2017 and 2018 relative to lows in 2015 and 2016 have not yet had a significant effect on operations in the GOM, but they have the potential to contribute to increasing rig counts and field discoveries in the coming years. Unlike onshore operations, falling rig counts do not affect current production levels, but instead they affect the discovery of future fields and the start-up of new projects.

October, 17 2019
Crude oil used by U.S. refineries continues to get lighter in most regions

API gravity of U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Refinery Report

The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.

API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.

The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.

Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.

Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.

lower 48 states production of crude oil by API gravity

Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report

When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.

Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.

By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.

U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Imports Report and Monthly Refinery Report

East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.

October, 14 2019