Bearish Market Sentiment due to Economic Slowdown
Aug. 4, 2023
We wanted to draw a comparison to today’s environment and the early 1990’s recession in the US. Prior to the 1990 recession, the economy was weakening as a result of restrictive monetary policy enacted by the Federal Reserve. Their stated intention was to reduce inflation and thereby limit economic expansion. The immediate cause of the recession was a loss of consumer and business confidence in tandem with the 1990 oil price shock. We now find ourselves in a similar environment where the Federal Reserve is raising interest rates (the Fed’s benchmark rate is now at a 22-year high of 5.25-5.5%) in an attempt to restrict economic demand.
Figure 1: Quarterly GDP vs. 3-Month LIBOR Figure 2: Quarterly GDP vs. World Refinery Intake
Source: JODI, FRED
Increasing interest rates make it more expensive for consumers and businesses to borrow, which ultimately can hinder overall economic growth and end-user oil consumption. As oil demand slides and so do refinery margins, crude and product tanker demand should also face downward pressure, which could last 12-18 months according to historical observations. Figure 2 demonstrates global refinery intake, measured in millions of b/d, in response to significant contractions in US GDP, such as those seen in 2008-2009 and 2020.
On the other hand, elevated interest rates will create more expensive financing costs for tanker newbuilding projects. This could put a lid on the number of new orders, providing support for the tanker market. However, this impact will be minimal for the prompt delivery years, with most upside support arriving 2-3 years later depending on shipyard capacity.
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