Transportation costs will come down as crude oil prices tumble

Implications: Senior Correspondent Eric Watkins, reported in the August 11 issue of the Oil & Gas Journal that benchmark tanker rates from the Persian Gulf to Japan fell to 7-month lows last week. The cause was ample availability of very large crude carriers. Even so, Japanese leaders are taking no chances on continued low rates. A free-trade agreement with the Sultanate of Brunei, signed in June, took effect on July 31. The part is another attempt by Japan to reduce dependency on Middle Eastern supplies. The agreement will greatly increase Japanese investment in Brunei. Japan is the sultanates largest crude oil importer. Seventy percent of Japan’s liquefied natural gas (LNG) comes from Brunei. Japan’s crude oil imports from the Middle East declined 9.4% from 2007. Saudi Arabia shipped 31.64 million barrels. Next was the UAE at 25.73 followed by Qatar with 13.33 and Iran with 8.24. Russia, fifth, shipped 4.91 million barrels. Japan cancelled a naval drill to conserve fuel.

Analysis:  Slow steaming to conserve fuel is an early symptom that crude oil markets are loosening up. If the trend continues, some high operating cost tankers will be laid up. This has all happened before beginning around 1980 and lasting almost a decade. Once it is clear that consumers are reducing purchases of gasoline and avoiding unnecessary travel, the word quickly spreads across the globe. Fuel riots in Europe and $5/gallon gasoline signs on service stations in the U.S are flashed around the globe on television. Everybody gets the message immediately. Once a genuine conservation effort begins, as has been seen before, the momentum builds and it becomes impossible to predict where the bottom will be for crude oil prices. Nations as well as individuals search high and low for places to save fuel. Airline travel costs go up. People stop flying. Airlines stack aircraft and jet fuel prices begin to fall. Only when oil companies announce project deferments and postponements and the OPEC nations begin to shut in excess capacity will it be possible to make a guess as to where prices will level off. Certainly, right now, they are in free fall. To put even further pressure on crude oil prices, the use of natural gas and liquefied natural gas (LNG) is not going to be affected to any significant degree. In the U.S., more than 80% of the rigs running are drilling for gas.The development of unconventional natural gas is becoming a mad scramble to get pipeline connections. Continued economic concerns related to the housing markets continue to weigh on financial decisions. Quite some time must elapse before balance returns to the world economy.