Supertanker Rates Crater // American Oil Politics

Suptertanker Rates Crater

Not long ago, supertanker rates punched through the roof in the scramble to secure crude after Russia Invaded Ukraine.

"Freight rates for very large crude-oil carriers (VLCC) along the Middle East Gulf to China route reached as high as $180,000 a day while VLCC time charter rates for floating storage jumped to as much as $120,000 per day," reports Oilprice.com.

Now, rates are in the gutter. Ships that can haul 2 million barrels of crude now earn around $38,000 per day. That's a 68% drop from a mere few weeks ago. What gives?

OPEC+ cuts and thinning SPR releases are blowing headwinds against short-term volume. "They cut production from the first of November and you would expect some lag, and we are seeing activity in the Middle East cooling off somewhat. That’s the simple explanation,” Lars Bastian Ostereng, an analyst at Arctic Securities told Bloomberg.

American Oil Politics

The Democrats are continuing their fight against Big Oil.

"Seven senators led by Bob Menendez of New Jersey are proposing to remove key tax provisions enjoyed by oil producers such as drilling cost deductions, deepwater royalty relief and carbon capture credits for enhanced oil recovery, according to legislation introduced on Thursday," reports Bloomberg. "The 'Close Big Oil Tax Loopholes Act' would also tighten up rules around deducting foreign taxes and the 'depletion allowance' for oil and gas wells."

Democrats seem to believe that after this year's high prices at the pump Americans feel greater hostility to Big Oil. Plus, they're trying to get this legislation through before the end of the year. Otherwise, they'll likely fail to get their legislation past the Republican-dominated House.

"Separately, Menendez is reviving a legislative effort, alongside Rhode Island Democratic Senator Jack Reed, to spur companies to more quickly develop their oil and gas holdings, by slapping a $10-per-acre annual fee on non-producing federal leases," reports Bloomberg. "The bill — the 'Use It or Lose It Act of 2022' — dovetails with a series of proposed leasing changes outlined by the Interior Department and measures advanced on Capitol Hill since at least 2008."

But does any of this address why companies aren't drilling?

Goehring & Rozencwajg believes that the oil majors are responding rationally to signals from three groups: politicians, investors, and their own strategy teams.

"Every proposal by the Biden Administration in response to high energy prices is either outright antagonistic towards the industry or, at best neutral," G&R write. "They have suggested banning crude exports (bad for producers and refiners), reducing gasoline taxes (good for consumers, neutral for producers), implementing windfall profit taxes (bad for producers), banning drilling on federal lands (bad for producers), and increasing subsidies for renewable energy (bad for everyone)."

As for investors, energy stocks have been trading at record low valuations. As long as valuations stay low companies will favor putting money in their shareholders' pockets over expanding drilling operations. Perhaps that's why Amos Hochstein, one of Biden's energy advisers, recently said that Wall Street's resistance to shale drilling is "un-American" even if it appears like a schizophrenic comments when looking at the full political backdrop.

As for internal strategy teams, G&R have argued for a while that Bakken and Eagle Ford have depleted their best resources.

So it shouldn't surprise us that companies aren't drilling. "On the one hand, you could increase activity, risk attracting the ire of policymakers, have your stock price go down, and deplete your irreplaceable asset," G&R writes. "On the other hand, you could return capital to shareholders, stay under the radar of policymakers, have the market reward your capital discipline, and keep your Tier 1 assets for a later time when the market will better value them."

So, this last ditch push to put the squeeze on Big Oil can only make matters worse.

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