OPEC production cuts to reach VLCC market

The rosy outlook for the tanker has taken another knock with the surprise announcement by OPEC of production cutbacks.

At the Capital Link Shipping Forum, held in New York at the end of March, a number of analysts and shipowners expressed the rosy opinion of “clear sailing” and “nothing can stop it” as discussions turned to the tanker markets. However, the oil industry had other plans – in the days following news of the US government’s takeover of SVB and Signature Banks and fears of a looming recession, WTI (the benchmark in the States) spot had rallied before falling below $67 a barrel.

The announcement of an upcoming production cut by OPEC members that could total more than 1 million barrels per day (bpd), half of which would be due to falls in Saudi Arabia’s production next month. When trading opened on Monday following the announcement, the Brent and WTI benchmarks both posted gains that pushed them above $80 a barrel.

For traded tanker stocks, the outlook has now become somewhat more cautious, albeit very nuanced. Indeed, OPEC’s move, which took place outside the mechanism of a formal meeting, appeared in retrospect to be a reaction to recession fears that surfaced in the second half of March.

Analyst Ben Nolan of broker Stifel wrote: “Things could not have gone better for the tanker market. Demand has been strong, and average travel distance has grown due to the war in Ukraine, and most importantly, supply growth is likely to be negative for a few years. In classic Murphy’s Law fashion (anything that can go wrong will go wrong), shipping seems prone to bad luck…. The fear became a reality as OPEC+ announced a 1.1 million barrel production cut this weekend, led by Saudi Arabia, which lasted from May through the end of the year.”

Jefferies analysts, led by Omar Nokta, wrote: “This is a negative development for tankers, albeit not a turning point. This aggressive cut will result in a significant drop in oil inventories in just a few months and improve the oil market outlook.”

Nokta and his crew further suggested, “VLCCs have bounced back and forth over the past year, with spot rates lagging other tanker segments due to inconsistent trade flows from the Middle East. This will continue as the 1mn bpd cut will come from Saudi Arabia, Iraq, UAE and Kuwait. VLCC spot rates recently surpassed $100,000 per day but are currently down to a still strong $75,000 per day (standard, non-eco).

“Looking ahead, we expect that lower freight volumes will impact VLCC demand, thereby putting pressure on spot prices…Other segments are likely to outperform as VLCCs will feel the brunt of OPEC cuts; medium-sized tankers and cargo carriers remain in short supply due to longer voyage distances and disruption from the EU ban on Russian crude and refined products.”

Stifel’s Nolan was similar, writing: “The impact of the cuts will likely be felt largely by the VLCC market as virtually all of the target volume is in the Middle East, ie the VLCC area. In addition, Russian oil production is subject to tanker size limitations and as these volumes still travel long distances, the Aframax and to a lesser extent Suezmax markets are likely to be more isolated. Underlying consumption and product tanker trade patterns are unlikely to be impacted and OPEC members typically maintain high refinery utilization and exports, with cuts in crude oil deals.”

Source: News Network