Corporate blog

VOLATILE OIL

Oil prices are now hovering at around $48 per barrel on global exchanges, and even short-term surges are making traders optimistic. This reaction is not surprising given that prices have been falling at various rates for the past two years.

19 May 2016

Oil prices are now hovering at around $48 per barrel on global exchanges, and even short-term surges are making traders optimistic. This reaction is not surprising given that prices have been falling at various rates for the past two years. In February this year, crude dropped to a long-time low of $27 per barrel. This is a major blow for exporting countries, but presents a challenge and new opportunities for Ukrainian business.

In February, the president of the international oil producer BP joked bitterly that soon all the world's pools would be filled with cheap oil. However, Ukraine is not a major oil producer and has few refineries. As a result, until recent only car drivers and logistics experts showed much interest in oil prices. But there is a reason why oil is covered by all business news outlets. Falling prices of this energy source might expand opportunities for exporters, but it also intensifies competition in the global market as new players arrive.

Here is one example. Remember the price in February of $27 per barrel? It immediately affected the price of freight delivery, as maritime shipping become more affordable and some companies no longer were taking the shortest sea route to Asia through the Suez Canal. A single crossing through this artery sets traders back a tidy sum of more than $100,000. Cheap oil made the extra two weeks in transit around Africa a better logistics option than the Canal toll.

The same goes for freight chartering. Imagine a Panamax class large vessel. It can carry 60–80 thousand tons of cargo. Ten years ago, it took 40 dollars per ton of cargo to charter a vessel like this from Yuzhny Port to Egypt. Now, the lease cost is 5–6 dollars a ton. The route of Ukrainian grain to Egypt appears to have become many times cheaper. There are several reasons for rates dropping to one-seventh the previous level. These include a downturn in the global economy, the resulting lower demand for maritime shipment and, of course, the price of the fuel: oil.

But there is another side to this coin. Cheap oil made Ukraine's traditional markets more accessible to other suppliers as well, making global trade tighter and competition fiercer. With cheap fuel and freight shipping, Brazilian agricultural traders have become more active in the Asian and Mediterranean markets, where they offer their soy and corn. There, they caused concern among traditional suppliers, including Ukrainian ones. Unlike global companies that have been learning to operate in these roller-coaster conditions since late 1990s, only recently have Ukrainian business been taking lessons in extreme driving.

But this is not all. The decline in the oil sector also affected very specific segments of the Ukrainian market, including the production of microspheres. This is the most peripheral type of coal combustion product generated from the burning of coal at CHP plants. The global market for microspheres is very narrow, with only a few players, including UMG. Only 100,000 tonnes of this product is manufactured per year, and 30–50% is purchased by oil and gas producers. In a stable market, oil producers pay more than $1000 a ton for this raw material. It is used to make backfill materials for oil wells, drill fluids and explosives. Declining investment in exploration and drilling of new wells immediately affected microsphere sales, which dropped by tens of thousands of tonnes. Consumers have become scarce, so microsphere producers are scrambling for each and every one.

Volatile oil prices has given quite a few surprises to Ukrainian exporters. Some have taken advantage of the situation and entered new markets. Foreign manufacturers also didn’t waste time entering traditional Ukrainian markets. The low cost of energy changed the rules of the game for global trade, and Ukrainian companies must once again learn how to play by them.

Source:
delo.ua 

Author:
Sergey Melnichenko
Sales Director