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Saturday's drone attacks on Saudi Arabia's critical oil
production assets will drive up uncertainty in the global tanker
industry given the region's huge sway on the crude oil shipping
market. Already reeling under heightened tensions in the Strait of
Hormuz, VLCC owners could see demand weaken over the next few weeks
amid lower export volumes out of Saudi Arabia.
Even as Saudi Arabia crude oil loadings on VLCCs in Ras Tanura
don't appear to have dipped materially and are maintaining normal
levels, the real test for the shipping demand lies ahead. IHS Markit Commodities at Sea
has identified three loadings on VLCCs on 17th
September, all heading to the Far East signaling drawdown of
inventory.
Barrels of Crude Oil loaded from Ras Tanura in September
2019
Impact on VLCC rates could only be determined by the volume of
production affected and extent of export volume loss. During this
and probably next week, the segment will be hit by a rapid decline
in cargo volumes out of Ras Tanura. VLCCs have been carrying more
than 90% of Saudi Arabia's exports, typically for destinations
across the Far East. With less cargo expected, several operators
will decide to reposition their ballasters to other exporting
regions, such as West Africa and US Gulf. However, current loading
schedules don't allow a lot of optimism to be developed, as most
loadings by the end of September and early October are already
fixed, as shown below.
VLCC Loadings in the region will probably fall to around three
per-day, as occured during the last couple of days. However,
freight rates might react in a very different way, as the
increasing risk of war between the US and Iran will further boost
rates for the segment around the world.
With Asia having absorbed most of Saudi Arabia's barrels,
countries such as China, India, Japan, and South Korea will need to
source more crude from elsewhere, most probably from the US, Latin
America, and Russia. Some buyers, especially in China and India,
could even try importing from countries under US sanctions, Iran
and Venezuela, but trade flows from these two countries remain low,
at least for now.
Loadings from the Red Sea is expected to be affected as well, as
the Abqaiq field has been supplying the Red Sea as well, with a
nameplate capacity of five Mn b/d. Yanbu exports typically stood
close to half a million b/d for VLCCs and roughly 100,000 b/d on
Suezmax ships. This translates, two VLCC cargoes per week and
around one per week for Suezmaxes. This typically represented
around 10% of Saudi Arabia's exports, usually ending up as European
imports. Even Aframaxes will be affected in the region, as cargoes
of DPP loaded in Yanbu will fall quickly, while loadings from Sidi
Kerir to Europe will decline sharply. Especially, as Saudi Arabia
is expected to prioritise long-term contracts, primarily with Far
Eastern importers and India. Europe will have to heavily rely on
alternate suppliers, probably the US, North and West Africa.
Tonne-miles could increase in some cases, but meanwhile demand
in terms of volume might decline, as higher oil prices might prove
strong enough to make Chinese buyers control their appetite for
more oil, even as we approach IMO 2020. Japan, South Korea and
India will probably start replacing some Saudi Arabia barrels with
US light grades, with a much longer distance to be covered by
VLCCs.
Russia has been recently targeting more exports to India, a
route that could be supported due to the lack of Saudi Arabia
barrels over the next month. China might lean even more heavily on
West Africa and South America, to avoid imports from the US.
Overall, Saudi Arabia might prove flexible enough to offset most
of the loss in production through inventories, but the country's
crude oil stocks have already reached the lowest levels in the last
decade, even before the attack.
Posted 18 September 2019 by Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime, Trade & Supply Chain, S&P Global Market Intelligence and
Rahul Kapoor, Vice President & Head of Commodity Analytics & Research, Maritime, Trade & Supply Chain, S&P Global Market Intelligence
