Will fuel oil be the catalyst to a Q4 freight rally?

The performance of Brent crude in the last four days has been nothing short of meteoric. A 10.5% rise in less than four trading days on the speculation that there could at last be a slowing of the global supply glut will be a welcome relief to oil producers and traders alike.

A rally in the black stuff will have far-reaching effects on the commodities world – cheap fuel equals cheap production and lower running costs.

The freight market, meanwhile has seen a reliable Q4 rally in recent years, specifically in the Capesize sector. That looked less likely this year as Chinese economic woes had been dampening expectations of a rally as rising steel inventories and a shrinking economy has kept shipping rates at deflated levels.

This could all be about to change. Loosened credit restrictions in China have already bolstered iron ore prices in recent weeks, which in turn has caused Capesize rates to rally before Golden Week. The return to the market of the Chinese ore consumers after the holidays has already had a steadying effect on freight rates.

This brings fuel oil into the equation. At 40–45% the cost of the Capesize voyage rate, a rising bunker market alongside continued ore buying could be the catalyst that kick starts the Q4 Capesize rally.

With hopes of a December interest rate hike in the US starting to fade, some traders are betting that a rally is on the horizon.