Recently, for the first time in eight years, OPEC decided to cut oil output by about 1.2 million barrels a day. It is also confident of soon securing a commitment from some non-OPEC countries to cut about 600,000 barrels a day. This in a concentrated effort to combat the increased supply of oil, which has pushed prices down to record lows.
But even though this is effectively limiting production of 1% of the world’s global oil supply, it won’t impact freight prices.
Well, it will. But not that much.
Looking back at ocean freight prices as a function of Brent crude oil in 2015, the correlation between fuel prices and freight prices is minuscule (-0.2 on a scale of -1 to 1). This is because changes to supply and demand are far more powerful forces in determining ocean prices. Those changes may be one-off events, like a sudden drop in ocean capacity because of, say, a top-ten ocean carrier going bankrupt, which can cause much more ocean price volatility than OPEC’s announcement will. There is also a seasonal change to supply and demand. The annual cycle based around the holiday shipping season has a much greater impact on ocean prices than just about any oil price change ever will.
The year of the rooster: Early freight pricing
About that annual cycle.
The Chinese New Year, also known as the Spring Festival, is one of the most important. It is celebrated on mainland China, Hong Kong, Macau, Taiwan, Singapore and other countries with significant ethnic Chinese populations. Chinese exports effectively shut down for a full week, beginning the night before the New Year. Since the Chinese calendar is a lunar calendar, the Chinese New year may fall out anytime between late January and late February.
What does this have to do with price of freight in China?
The buildup to the Chinese New Year is nearly always the freight holiday shipping season’s last hurrah. The cycle starts in June or July with a slow climb, peaks in November and then drops off after Black Friday/Cyber Monday weekend. This trough generally lasts until right after the Christmas/New Year break. After the Turkey & Tree break, procurement professionals are faced with the task of replenishing stock before the looming Chinese New Year shutdown. As a result, last year, Greater China-US freight prices shot up by nearly 25% in the first week of 2016.
The next Chinese New Year falls early – on January 28th. This means that the price spike may come as early as W51 (December 19th). That said, freight prices this holiday season are already 27% higher than the same period last year, so the market tolerance for higher prices may be lower than previous years.