The infrastructure on both sides of this trade is highly efficient and due to their economies of scale, VLCCs dominate the Middle East/Asia trade, Gibson Shipbrokers said in a report.
In the first quarter of this year, 85% of the seaborne crude oil trade on this route was handled by VLCCs, with only 11% shipped on Suezmaxes and 4% on Aframaxes.
Unfortunately, the Middle East is not only the largest crude oil producing region in the world, it is also the dominant source of geopolitical tension, as well as the self-appointed market arbiter that is responsible for keeping the global crude oil markets balanced.
The combined result of all this is that the oil markets in general and OPEC’s production in particular have become rather unpredictable. This is having a large impact on the tanker market, Gibson said.
OPEC’s crude oil production (excluding NGLs) was at a multi-year low of 31.64 mill barrels per day in April, 2018 and in May of that year, President Trump decided that the US was withdrawing from the Iran Nuclear Deal.
Following this announcement, OPEC producers started to increase output in anticipation of the re-instatement of US sanctions on Iran. When waivers were issued, the oil market became oversupplied and OPEC cut back again.
Since crude oil production and tanker employment are clearly correlated, all these changes in OPEC production had a direct impact on VLCC rates in the second half of 2018 and into 2019.
The sanctions on Iran were not the only sources of market uncertainty and volatility. Venezuela and –to a lesser extent –Libya contributed as well. Venezuela’s crude oil output and exports have been declining for years, primarily as a result of under-investment, poor maintenance, parts shortages and general mismanagement of the oil industry by the Venezuelan regime.
Political turmoil and tough new US sanctions have cut Venezuela’s output to less than 800,000 barrels per day, according to the latest figures available. Since a significant portion of Venezuela’s production was exported to long-haul destinations such as China and India, the rapid decline in output had a detrimental impact on the VLCC market.
Unlike the situation in Iran, Venezuela’s problems are more structural, so even if the political crisis is resolved and sanctions are lifted, it will take many years for Venezuela to turn its oil industry around and increase output and exports.
The Libyan problems also seem to be far from being resolved and oil production and exports are quite volatile and unpredictable. Over the last 12 months, Libyan production has ranged from a low of 670,000 in July, 2018 to a high of 1.15 mill barrels per day in October, 2018.
Where exports will go in the coming months is anybody’s guess as it appears that the country is again on the verge of a civil war. Libyan developments will have the biggest direct impact on the Aframax market in the Mediterranean, Gibson said.