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The decision by OPEC and its partners to unwind production
quotas from next month bodes well for tanker demand, even as data
shows that seaborne crude shipments by OPEC producers increased
month on month in March, primarily driven by higher exports from
Iraq, the UAE, Angola and Libya.
Total shipments climbed to 19.3 million b/d, from 18.1 million
b/d in February, according to preliminary data from IHS Markit Commodities At Sea
(CAS).
Saudi Arabia exported 300,000 b/d more than a month ago, even
though it had pledged a voluntary unilateral one million b/d
production reduction in February and March. A deep backwardated
structure in crude futures prices likely prompted some destocking
from domestic storage, which, along with some refinery maintenance
in the kingdom, partly explained why Saudi Arabian crude exports
did not decrease.
Seaborne exports from Russia, the biggest Plus producer, fell to
four million b/d from 4.4 million b/d a month ago, taking flows
from the OPEC+ group up to 26.8 million b/d from 25.9 million b/d
in February. Most recent data by Commodities at Sea show that
global seaborne crude oil exports remained below 40 million b/d for
a third consecutive month, with US output impacted sharply by
freezing temperatures in the south.
At its monthly meeting on April 1, OPEC+ agreed to loosen output
quotas by 2.25 million b/d between now and July, a move that had
been already anticipated given the tighter global crude market
expected in H2.
The coalition expects oil demand to recover further over the
summer, with additions of up to three million b/d by July vs April,
resulting in a supply deficit of 700,000 b/d between May and July,
according to IHS Markit.
Growth in the U.S. meanwhile looks muted, with shale output
potentially declining another 485,000 b/d by the end of the year
and producers hesitant to bring on big increases.
One of the key questions going into the meeting was if both
Russia and Kazakhstan would continue to be allowed to raise output,
and how this would sit with other members in the coalition. Both
countries raised their quotas by a combined 75,000 b/d in February
and March and by 150,000 b/d in April. Media reports suggested
Russia had been clamoring to raise output further while the UAE,
fresh from the launch of its IFAD Murban crude oil futures
contract, was also not keen on extending cuts.
The scenario of a quicker unwinding of production quotas has
been a compromise for Saudi Arabia, which was earlier targeting to
loosen production cuts only once Brent price approached $75/b.
In May the group will raise their collective production quotas
by 350,000 b/d, and Saudi Arabia will ease its production cap by a
further 250,000 b/d, for a total of 600,000 b/d.
In June OPEC+ will raise output by 350,000 b/d and in July by
440,000 b/d, with Saudi Arabia increasing another 350,000 b/d and
400,000 b/d, respectively.
The increases come when the Middle East will see peak demand for
power generation in summer and Saudi Arabia likely has taken a
bullish view of the market given it raised differentials for
official selling prices for its May-loading crude to Asian
customers by between 20 cents/b and 50 cents/b while U.S. and
European bound cargoes saw some grades unchanged and others cut by
between ten cents/b and 30 cents/b.
That said Asian buyers could balk at the higher differentials
given the plethora of options from the North Sea and West Africa.
As well, China is reportedly now taking in more Venezuelan and
Iranian cargoes.
Iranian crude oil exports to China are estimated to have
recently reached up to one million b/d in March, with most of the
supply coming from floating storage, can we attribute this to a
source?
Meanwhile negotiations between Washington and Tehran on
sanctions relief are underway, with indirect talks kicking off this
week between EU intermediaries in Vienna, although an immediate
solution is not likely. Washington demands a full return to the
JCPOA as a prerequisite to talks, while Tehran insists on lifting
sanctions on its two million b/d of crude exports before it comes
to the table.
Separately, exports out of Libya, which is exempt from the
current production cuts, averaged 1.2 million b/d of crude oil in
March, up 200,000 b/d from January. The country's oil production
continues to grow amid the recent formation of an interim
government.
The decision by OPEC+ to raise output has improved sentiment
across oil tanker ship operators, with VLCC demand set to recover
as crude oil production and exports should increase from May
onwards.
Despite the temporary support driven by the six-day blockage of
the Suez Canal last month, crude tanker freight rates remain under
massive pressure, with several ships operating below break-even
levels due to tonnage oversupply. Suezmax and Aframax spot earnings
fell below $10,000 per day in late March, while VLCCs carrying
crude oil from Middle East Gulf to China did not earn more than
$1,000 per day. The additional oil supply should benefit tanker
earnings, especially for bigger units, with brokers expecting VLCC
earnings to increase by $5,000 to $10,000 per day. This despite
European oil demand likely to remain stagnant due to slow rollout
of vaccinations and fresh lockdown measures.
Activity has been rather limited during the Easter week, with
several cargoes to be lifted in mid-April from the Middle East Gulf
yet to be booked.
More units previously employed for floating storage will return
to the region for the additional cargoes in coming months, while
floating storage has returned to pre-pandemic levels.
There are currently fewer than 20 VLCCs locked into storage work
for more than 15 days. But with higher exports from May, the number
of fixtures should start increasing from H2 April.
