Tanker market taken by surprise by OPEC decisions

by Andrew Lansdale

Many commentators in the tanker market were taken by surprise by the OPEC decisions. The meeting in Algeria urged member states to stick to their production quotas, maintain the production ceiling at 24.5 mm bpd, but to reduce this ceiling by 1 mm bpd from April 1.
It was agreed that remedial supply responses were needed to maintain the market balance and avert downward pressure on oil prices. It was recognised that we are moving into a seasonal period of weaker demand where downward pressure on oil prices becomes prevalent.

The current weakness of the dollar was also taken into account, with the exchange rate dropping against major currencies such as the sterling and the euro. Early signs suggest that one major producer has told Eastern customers that March volumes will be in line with February's.
There is also some evidence that more than one OPEC member has hinted that April's cut may depend on whether the oil price is maintained. It was also interesting that theoil minister from Mexico attended the OPEC meeting.

Saudi Arabia, Canada and Mexico each contribute about 1.5 mm bpd to US crude oil imports. The domestic US inventory remains at a very low level and is still close to the 28-year low reached in December.
It now stands at 10 mm barrels below last year's and about 60 mm below the 5-year average. However, it is significant that the US strategic stockpile continues to grow and now totals 42.6 mm barrels above a year ago. A new six-month contract for 19 mm barrels was announced commencing in April.

The VLCC market remained strong during the first half of the period under review in respect of the Gulf market. Rates firmed by 5-10 %, helped by a build up of tonnage in the Atlantic basin and the Mediterranean. However, this build-up allowed freights in the Western hemisphere to slip by some 20 % from a very high level down to just a high level of around Worldscale W150.
Such high rates in the first week of this report saw charterers fixing tonnage for March liftings, despite the fact that no cargo nominations had been announced. Rate levels of Worldscale 165 were maintained for Eastern discharges. Figures announced suggested that Japan and Korea experienced a fall in oil imports of 3.1 % to 8.889 mm bpd last year, while China continued to surge ahead with growth of 5.1 % to 5.3 mm bpd.

In the second week under review, the Gulf market slowed considerably as refiners waited for official March cargo nominations and rates fell to nearer Worldscale 120. In the Western hemisphere, an over-supply of tonnage was felt, leading to more than half the fixtures failing and subsequent falls in rate levels.
Several oil traders were exploring the possibility of moving large volumes of fuel oil from either Europe or refineries in the Caribbean to the Singapore market. A large number of vessels were fixed 'subject to contract terms' only to fail as the expected oil price differentials did not materialise.

The income levels for 1 mm barrel tankers has moved ahead again after the somewhat mediocre previous seven days. Owners have been able to recoup some of the losses in rate levels in the Western hemisphere, but there is still pressure on rates for East of Suez cargoes. There has been more activity in West Africa as charterers show a preference for Suezmax's against VLCCs and there has been a slight upturn in rates for voyages to the US.
It must be said though that there is some nervousness about as guaranteed employment started to look less sure. In the Mediterranean area, combined northbound/southbound delays for transit into and out of the Black Sea have started to reduce but still remain at a high level of some 14-21 days.

It is an interesting observation that oil companies are prepared to accept delays which double the voyage time. Commentators suggest that there is a long-term strategic argument to be made for encouraging Black Sea crude oil exports. Delays are acceptable in the short term until a pipeline through Turkey by-passes the choke point in the Dardanelles.
Freight rates still fluctuate though, and a slight over-supply of tonnage has seen rate levels slip from a high level of close to Worldscale 200 down to Ws 165.

Rates for this size of tonnage dropped off in all areas in the early part of the period under review. Towards the end of this, they appear to have flattened out except in the Caribbean where more activity drove rates upwards in what is in any case a more volatile market.
Delays in the Bosporus make it more worthwhile for charterers to accept this lost time on Suezmax tonnage than on Aframax vessels and this reduced their popularity in the region. This put downward pressure on rates.
In the Arabian Gulf, a two-tier market is evolving where high quality vessels with oil company approvals are achieving higher rates than less well-endowed ships. This rate structure has been a fact of life in the Mediterranean for some time, but is a comparatively recent phenomenon in the Gulf.

Andrew Lansdale is a shipbroker and marine consultant with more than 40 years experience in the tanker and dry cargo markets.