Caution when forecasting 2019 tanker rates warning

Dec 14 2018


On Friday of last week, OPEC and non-OPEC countries reached an agreement to cut output next year.

In essence, the agreement reached was to cut a combined 1.2 mill barrels per day, with OPEC dropping 800,000 barrels per day and non-OPEC producers by 400,000 barrels per day. Iran seemed to have been left out in making cuts.

The production cut will start January, 2019 and will use October, 2018 output levels as a baseline, Poten & Partners said in an analysis.  

There was a lot more uncertainty this time around because the various producers were in very different situations, politically as well as economically. For example, Iran is facing US sanctions, Qatar is leaving the cartel and Venezuela’s production continues to struggle.

While Russia is reported to be okay with an oil price of $60 per barrel, some OPEC

Producers, including Saudi Arabia need prices in the $80 per barrel range to balance their budgets. Brent prices, which are around $62-63 per barrel at the end of the first week of December, were as high as $85per barrel only two months ago, when fears about the impact of the Iranian sanctions on global oil balances peaked.

Against the backdrop of this uncertainty - or maybe because of it - the tanker market is holding up fairly well. However, a significant cut in exports will test the strength of the market in the coming months.

While it appeared that Saudi Arabia and Russia are the only countries that are relevant, the co-operation of the other members is still needed for OPEC to reach a formal agreement.

At the same time, the US, with its growing production and vocal president, is looming large in the background. Last week, the US became a net oil exporter for the first time in 75 years, while earlier this year, it became the largest crude oil producer in the world, surpassing Russia and Saudi Arabia.

For the large tanker market, OPEC output decisions continue to be very important, both physically and psychologically. The previous OPEC cuts that went into effect in January, 2017 had a significant impact on the VLCC market.

VLCC TCE earnings on the benchmark Arabian Gulf to China route went from $55,000 per day in December, 2016 to just $16,000 per day in March, 2017, as production from Middle East OPEC countries dropped by 1.2 mill barrels per day.

The large tanker market remained depressed throughout the rest of 2017 and only started to recover in October, this year, a few months after OPEC producers, in particular Saudi Arabia, started to ramp up production again.

There is not always a direct correlation between OPEC production and VLCC rates.

Sometimes there is a time lag, while at other times the two seem to be trending in the opposite direction, Poten said.

Throughout 2016, for example, tanker rates declined almost continuously. TCEs ended 2015 at a high $100,000 per day, but they averaged only $12,500 per day in September, 2016, a decline of 87.5%.

During the same time period, Middle East OPEC production increased from 23.7 mill barrels per day to 25.4 mill, a 7.2% increase. A significant part of this increase came from Iran, as the international sanctions against the country were lifted as of January, 2016.

To explain why the VLCC market came down while OPEC lifted production, we have to look at the supply side. Some 45 VLCCs were delivered during 2016, more than 2014 deliveries (22) and 2015 (20) combined. Iranian vessels, previously employed in floating storage also started to re-enter the market adding downward pressure on tanker rates and reinforcing more negative market psychology.

So, what will happen to tanker rates this time around? Poten said that while psychology may put downward pressure on tanker rates in the short term, the ultimate driver will be how actual crude oil flows and tonne-mile demand compares with fleet supply.

Thus far, 41 VLCCs have been delivered this year, with another nine are due this month. Some of these will undoubtedly move into 2019. This may give owners pause, since there are already 61 VLCCs scheduled for delivery next year.

With the planned cut in production, we think it is prudent to be relatively cautious about tanker rates in 2019, Poten warned.

 



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