Markets - OPEC still pumping

Jun 19 2015

OPEC's recent announcement that it would maintain crude production came as little surprise to the global oil markets.

A statement saying that its production target of 30 mill barrels per day would remain unchanged failed to stimulate much of a market reaction and was largely perceived as little more than a token gesture to Iran, one of the most vocal opponents of the de facto strategy of defending market share at the expense of prices, Gibson Shipbrokers said in a report

The members have not adhered to their production targets for the past 12 months and few expect that to change any time soon. It therefore seems apparent that OPEC Middle East crude production - a key driver of crude tanker demand, will remain robust for the balance of 2015 at least.

Despite Iran's stance on OPEC's strategy, its ministers have been clear that Iran intends to restore exports to pre-sanction levels if restrictions are lifted. Iranian ministers have said that production could increase by 500,000 barrels per day soon after sanctions are lifted and by the same amount within six months.

Whilst some market participants believe Iran is overstating its capabilities, the roughly 38 mill barrels of Iranian oil in floating storage, in addition to shore-based stocks could quickly add supply to the market. Nevertheless, talks between the West and Iran are due to conclude this month, increasing the prospect of more Iranian barrels, even if the absolute volumes are questionable, Gibson said.

Even if these barrels do materialise, there is little indication that other OPEC members would be prepared to sacrifice their own share in order to accommodate Iran’s ambitions.

In addition, Iraq is planning to increase exports, despite continued turmoil in the country. Having recently split Basrah Light into two grades in order to stabilise quality, Iraq now has more flexibility to boost production and exports of Basrah Heavy.

However, logistical problems remain. Loading delays continue and Basrah now requires tankers loading heavy crude to be fitted with cranes with a minimum safe working load (SWL) of 20 tonnes, ruling out around three quarters of the trading Suezmax fleet from loading the heavier grade, thus allowing suitable vessels to command premiums.

Ultimately there is more Middle East OPEC crude in the pipeline, although barriers, whether political, logistical or seasonal remain. Taking Iran out of the equation, higher OPEC production over the coming months may not translate into higher tanker demand, as domestic air conditioning use peaks throughout the summer months whilst the Yanbu and Ruwais refineries also continue to consume regional supplies.

However, global oil demand is rising faster than initially anticipated with the IEA’s latest report projecting 2015 demand growth of 1.4 mill barrels per day, double the growth seen in 2014, providing a further incentive for OPEC members to continue to produce and subsequently supporting tanker earnings for the balance of 2015, Gibson concluded.

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