Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut oil production by 1.2 million barrels a day during their 5th meeting held on December 7 in Vienna. The contributions from OPEC and the voluntary contributions from non-OPEC participating countries of the ‘Declaration of Cooperation’ will correspond to 0.8 million barrels a day (2.5%), and 0.4 million barrels a day (2.0%), respectively.
The decision came just days after the U.S. President Donald Trump called on OPEC to maintain production at the same level. “Hopefully OPEC will be keeping oil flows as is, not restricted. The world does not want to see, or need, higher oil prices!,” Trump said in a Tweet. Commenting on the decision, Iranian President, Hassan Rouhani said that ”despite the American’s efforts to interfere in OPEC affairs and attempting to disrupt the balance, with the resistance of member countries and the Islamic Republic of Iran and Mr Zanganeh, Chairman of the Board, National Iranian Oil Company, their plots were foiled, marking another failure for them.”
Iran, which has been faced with U.S. sanctions, is believed to have been exempt from making the cuts. OPEC-led production reduction is being announced at the time when the tanker market is finally exiting from the doldrums. “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,” Poten and Partners said in a weekly report.
As explained earlier by CEO of Tsakos Energy Navigation (TEN) and Chairman of INTERTANKO, Nikolas Tsakos, ”the market right now has learned to live with the cap.” Commenting on the anticipated OPEC cut before the decision was announced, Tsakos said in a conference call that it was good for the market that three major producers of oil are outside the OPEC or independent of OPEC, those being the United States, Saudi Arabia and Russia. Since these three countries make up almost 35% of oil production, the impact of OPEC cuts is expected to be somewhat lessened. However, Tsakos believes that a large daily cut of about one million barrel per day would help the market normalize in the long-term.
The U.S. in particular is gaining an ever more important role in the market as last week it became a net oil exporter for the first time in 75 years. Another milestone for the country was achieved earlier this year, when the U.S. became the largest crude oil producer in the world, surpassing Russia and Saudi Arabia, data from IEA shows. “Overall we see an oversupplied oil market. Cutting into a surplus of oil will not have a massive effect on tankers,” Peter Sand, Chief Shipping Analyst at BIMCO told World Maritime News.
Sand added that based on the information from large middle eastern oil producers there are not enough buyers for the level of production right now. According to Poten, 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 (Very Large Crude Carriers) market. Time Charter Equivalent (TCE) earnings for VLCCs (Very Large Crude Carriers) on the benchmark Arabian Gulf to China route went from USD 55,000/day in December 2016 to USD 16,000/day in March 2017 as production from Middle East OPEC countries dropped by 1.2 million b/d.
The large tanker market remained depressed throughout the rest of 2017 and only started to recover in October 2018, a few months after OPEC producers, in particular Saudi Arabia started to ramp up production again. Nevertheless, Poten pointed out that there is not always a direct correlation between OPEC production and VLCC (Very Large Crude Carriers) rates, as the two can be trending in the opposite direction. Throughout 2016, tanker rates declined almost continuously. TCE’s ended 2015 at a lofty USD 100,000/day, but they averaged only USD 12,500/day in September 2016, a decline of 87.5%. During the same time period, Middle East OPEC production increased from 23.7 million b/d to 25.4 million b/d, a 7.2% increase.
A significant part of this increase came from Iran as the international sanctions against this country were lifted as of January 2016. In order to understand why the VLCC (Very Large Crude Carriers) market came down, one needs to look at the full picture, and especially the supply side. A total of 45 VLCCs (Very Large Crude Carriers) were delivered during 2016, more than the deliveries of 2014 (22) and 2015 (20) combined, Poten’s data showed. Iranian vessels, previously employed in floating storage also started to re-enter the market adding downward pressure to tanker rates and reinforcing more negative market psychology.
“While psychology may put downward pressure on tanker rates in the short term, the ultimate driver will be how actual crude oil flows and ton-mile demand compares with fleet supply. So far, 41 VLCCs (Very Large Crude Carriers) have been delivered this year, with another 9 on the books for this December. Some of these will undoubtedly move into 2018. This may give owners pause, since there are already 61 VLCCs (Very Large Crude Carriers) 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 said.