William Hogg
Senior Analyst, Infospectrum
We often talk about the importance of liquidity in the sectors we cover - perhaps most recently looking into the reliance of asset-light vessel operators on the "bank of bunkering". However, the last two years have arguably seen an excess: cash-rich owners (and some operators) and traders holding banking and supplier credit lines that, largely due to oil prices and subdued demand for oil and credit, were significantly in excess of demand. Smaller, less liquid, traders thrived in an environment with far lower barriers to entry.
The last two weeks, and the last few days in particular, have turned that excess into an opportunity for some, and placed significant focus on the reserves of others. With oil prices moving from circa USD 80/barrel as of early March to almost USD 120 a barrel as of yesterday, and returning to USD 85/barrel as of the time of writing, traders have been scrambling to find, and afford, oil products, and ascertain whether they could meet forward obligations booked only a short time ago. Prices for certain bunker grades have doubled during this period, with governments, particularly in the East of Suez markets, implementing export bans for products regarded as strategically valuable.
For those with money and access, it's a month that could transform what was otherwise going to be a bleak year - higher oil prices and significant information/credit/availability arbitrage tend to lead to higher margins for almost all traders, and this pricing disruption is likely to remain for some time despite the fall in crude prices. For the less liquid, the volatility is likely to see a return of credit discipline, cutting terms, focusing on good clients, and squeezing the maximum out of supplier credit and finance, or, if not possible, stepping out of the market.
Hedging is unlikely to have eased the pain over the last few days. Those with paper positions are likely to have faced margin calls reminiscent of the period just after Russia's invasion of Ukraine, with the latter seeing even high-profile, well-known, traders come under scrutiny (some of these securing greater liquidity earlier this week and others rumoured to have taken more "direct" action with their trading desks). Derivatives won't solve all problems either - positions held are unlikely to adequately cover the pricing dynamics of physical delivery premiums (now said to be in the region of USD 300+/tonne in some ports) and less liquid products such as LSGO.
The impact of this credit tightening on smaller traders (some of whom rely on the support of shareholders, and who have had quite a lean period over the last 12 months), and operators (in the dry bulk market in particular) is likely to be significant, as the cash flow models change to meet shorter bunker payment terms and higher oil prices, and the ability to quote business without certainty over a key decision input (firm pricing and availability for bunkers bought for later delivery) comes under strain.
Assuming we have not seen the last of Iran-related oil price shocks and their aftereffects, it's also a period when truly knowing your counterparties rewards those who invested in this area: who to keep, and who to cut. Key things to look out for:
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