Shipping and market congestion

Foreign Affairs printed an article on the risk to shipping in the oil market by two political
scientists Dennis Blair and Lieberthal, “Smooth Sailing: The World’s Shipping Lanes are safe”. http://www.foreignaffairs.org/20070501facomments86302/dennis-blair-kenneth-lieberthal/smooth-sailing-the-world-s-shipping-lanes-are-safe.html They argue that the risks of shipping being disrupted from some political event are overdone. Unfortunately, the article misses the key issue with shipping and oil markets. Oil shipping is a problem. The issue is infrastructure and this cannot be solved in the near term. Thanks to a recent discussion with an oil shipping expert for focusing me on this issue.

The key shipping problem is port congestion and not the risk from transportation. For example, there is a shortage of gasification ships and port facilities for LNG in the United States. There are limits in the size of ships that can move oil and LNG out of the Black Sea. There are limits and high cost in moving oil through the Suez Canal. Pipeline have to be laid as an alternative to shipping.

The number one problem for the energy industry is infrastructure and not geopolitical. These problems will be tested again during the coming hurricane season. Regardless of the type of season, concentration of facilities in an areas prone to hurricanes and has the potential for disruption.

Logistics in the energy business whether oil, natural gas, ethanol, or electricity will be a key issue with these markets. It is logistics which will actually be the determinant for changes in spreads in futures markets. Price behavior across seasons is an inventory refining problem. Changes in backwardation and contango are associated with changes in supply today relative to what may be needed tomorrow. In a period when there are no looming geopolitical risks, spread trading will be dominated by infrastructure congestion.