Unfortunately, that has not been the case.
While the start of the year was encouraging, following the strong 4Q18, crude tanker rates have weakened in recent weeks to levels last seen a year ago.
Poten analysed the main reasons for this scenario.
OPEC cuts that were implemented in early 2019 have obviously had a negative impact on the tanker market. Member countries production in 1Q19 averaged 30.58 mill barrels per day. This is 1.42 mill barrels per day (4.5%) less than the same period in 2018, which averaged 32 mill barrels per day.
A comparison with 4Q18 showed an even bigger difference: 30.58 mill versus 32.8 mill barrels per day; a reduction of 2.32 mill or 6.8%. OPEC’s March, 2019 production of 30.13 mill barrels per day was the lowest monthly average since February, 2015 (30.10 mill).
Saudi Arabia was the most significant contributor to the changes in production. In 2018, the Kingdom increased output from a low of 9.92 mill in April to a high of 11.06 mill barrels per day in November. This was partially meant to offset the reduction in Iranian output due to the reinstatement of US sanctions against the regime.
Iran’s production fell by more than 1 mill barrels per day - from 3.83 mill in June to 2.8 mill barrels per day in December.
Another ‘loser’ during this time frame was Venezuela. According to the IEA, this oil rich country started 2018 with production at 1.61 mill barrels per day and ended the year at 1.29 mill.
Continued political and economic turmoil has currently reduced Venezuelan output to well below 900,000 barrels per day, Poten said.
Global oil demand increased by 1.1% in 1Q19 versus 12 months ago. Since OPEC output declined by 1.6 mill barrels per day, other producers must have stepped up and/or global stocks declined significantly. It appears that both developments played a role, as stocks decreased and non-OPEC production, particularly in the US, increased.
To determine the impact on the tanker market, he changes in tonne/mile demand need to be looked at. Comparing 1Q19 with both 1Q18 and 4Q18 showed an interesting picture. Global tonne/mile demand for crude oil and dirty petroleum products increased from 875 bill per month in 1Q18 to 920 bill tonne/miles per month in 4Q18 - a 5.1% increase.
All major tanker segments contributed to the increase - VLCCs (+4%), Suezmaxes and Aframaxes (both +7%).
Mainly due to the OPEC production cuts, total tanker tonne/mile demand in 1Q19 declined by 5.6% relative to 4Q18. As a result, global tonne/mile demand in the first quarter fell below demand in the same period a year ago.
However, the decline in tanker demand was not evenly distributed, as Suezmaxes (-13.2%) and Aframaxes (-12.1%) bore the brunt of the decline. VLCC tonne/miles held up much better with a drop of 1.6%, because of the US crude oil exports increase.
These long-haul voyages –mostly destined for Asia – benefited VLCCs more than Suezmaxes or Aframaxes. However, while tonne/mile demand for VLCCs declined much less than demand for Suezmaxes and Aframaxes, the impact on rates was the same, as VLCC earnings suffered just as much as Suezmax and Aframax earnings.
There are two possible explanations for this apparent paradox: vessel supply and market psychology. In 1Q19, 17 VLCCs were delivered and none scrapped. For Suezmaxes the numbers were 18 deliveries and two removals and for Aframaxes, 18 deliveries and seven removals.
These numbers do not explain why VLCC rates suffered just as much as the medium sized tankers, despite a much smaller decline in tonne/mile demand.
That leaves market psychology as the most likely explanation, as tanker rates are driven as much by psychology as by underlying supply/demand balances. While VLCCs showed better fundamentals, rates were pulled down by the poor overall market sentiment, Poten surmised.