OPEC+ production cuts have dire implications for oil tankers
The agreement of the members of OPEC and its allies to cut oil production by 9.7 million barrels of crude per day is not believed to be enough to offset the massive demand drop and will certainly have dire implications for the oil tanker shipping market.
“The first quarter of 2020 has been one of the most profitable quarters in the past decade for crude oil tankers, which will hopefully provide a liquidity buffer for the challenging months that lie ahead. Once the production cuts set in, the profitable journey is likely to grind to a halt,” says BIMCO’s Chief Shipping Analyst, Peter Sand.
Poten and Partners agreed in their tanker report, saying that even though some issues may arise when it comes to compliance especially by Russia, the industry will not have a choice once the spare storage capacity starts to fill up.
“The real choice is between a somewhat orderly process of production cuts where the large oil producers monitor the markets and coordinate output reductions or – alternatively – an unpredictable process of abrupt cuts driven by individual companies that can no longer afford to produce at prevailing prices. The latter process will more likely lead to chaos and widespread bankruptcies across the globe that will benefit neither the oil nor the tanker markets,” Poten said.
Floating storage a temporary buffer
The International Energy Agency (IEA) predicts global oil demand in 2020 will decline by 9.3 m/bpd year-on-year, effectively a collapse in oil demand. The IEA also estimates that floating storage picked up by 22.9 mb in March to a total of 103.1 mb, equivalent of 52 VLCCs (assuming 2 mb capacity).
Additionally, given the low oil prices, it seems likely that oil reserves on land and in floating storage will continue to fill in the coming weeks, but the trend is not expected to hold for a prolonged period and, accordingly the positive boost to the crude oil tanker market is likely to evaporate after Q2.
UK-based consultancy Drewry believes that if oil production outside OPEC+ fails to observe a significant decline in production, the market will be in surplus by more than 20 mbpd in May and 9 mbpd in June, despite the production cut by OPEC+.
In such a scenario estimated spare onshore storage capacity of about 1-1.3 billion barrels at the beginning of 2Q20 will be exhausted by the end of May.
This, in turn, will inflate the demand for floating storage towards the end of the quarter and surplus oil will absorb about 4-5 VLCCs per day in June.
If oil production in countries outside OPEC+ declines by about 3.5 mbpd and countries such as South Korea, India, China and the US increase SPR by around 200 million barrels, the available spare onshore storage capacity will probably manage to absorb excess supply from the market. If this proves to be the case. Drewry expects freight rates in the crude tanker market to drop significantly in May-June from current levels.
Additionally, as oversupply will cap any surge in oil prices in 2Q20, most of the 55 VLCCs and 24 Suezmaxes currently locked in floating storage are unlikely to return to active trade before any possible recovery in oil demand and prices in 3Q20. In such circumstances freight rates in the crude tanker market will hit the roof, as a rise in floating storage will squeeze tonnage supply even further.
While the uptick of floating storage takes a substantial chunk of capacity out of the market, providing some silver living, it will not be enough to offset the sliding demand and overcapacity. according to BIMCO. Therefore, it is expected that the second half of 2020 will face a radically different reality than the first half of the year.
“With oil demand collapsing from one quarter to another, the crude oil tanker market is facing disruption on an unparalleled scale. It seems plausible that the market will not return to ordinary supply and demand fundamentals until perhaps the third quarter of 2021,” Sand says.
Faced with an economic downturn not seen since the Great Depression, a tough year with plenty of uncertainty lies ahead. BIMCO expects somewhat of a normalization for shipping markets in 2021, given the current information available.