How Volatility in Oil Prices Caused by Coronavirus Could Affect Shipping and Insurance
Published on the 3rd March 2020
The spread of coronavirus and its impact on global oil prices could create additional risks throughout the marine transport industry.
The novel coronavirus (Covid-19) is already threatening oil markets, having greatly affected China’s industrial production levels and, consequently, its oil importing requirements. The fear of less demand — from China and eventually globally as the economic impact widens — has sent crude oil to its lowest price in more than a year.
China is the largest oil importer in the world by far. In December it imported nearly 11 million barrels per day — about 10% of total global oil production — according to China’s General
Administration of Customs. China’s oil demand has since dropped by about three million barrels a day, or 20% of total consumption, reported Bloomberg.1
This is affecting the global energy market, with sales of some crudes slowing to a crawl and benchmark prices in free fall. Sales of Latin American oil cargoes to China recently halted, while sales of West African crude, a traditional source for Chinese refineries, have also slowed down. These changes are increasingly reflected in the oil trading markets, with the futures market once again moving into a “contango” state, raising concerns in the marine insurance market.
What is Contango?
Investors buy futures contracts when the future open market, or “spot” price, is expected to be higher at the time of delivery than the price agreed under the futures contract — thereby usually enabling the investor to make a profit when the goods are sold on.
A gradual, long-term increase in prices is the market norm — a state often described as “backwardation.” However, when events occur that threaten to reduce demand, there is no guarantee that the future spot price will be higher at the time of delivery. When a market has unexpectedly weakened — to the point that the commodity’s market price is expected to be lower on delivery than when agreed within futures contracts — the market is said to be in “contango.”
The marine transport and oil-trading industries should prepare for the knock-on effects, and check that their insurance cover is as effective as practicable in this contango market — which may deepen over the coming months.
These recent developments may have implications for the marine insurance market, including for marine cargo insurance, marine hull insurance, oil traders’ liability insurance, charterer’s legal liability, and protection and indemnity cover, which are discussed in this article.