“In classic Murphy’s Law fashion, shipping seems prone to misfortune,” lamented Stifel analyst Ben Nolan in the wake of Sunday’s surprise OPEC+ production cuts. “Things could not have been going more right for the tanker market” until OPEC+ gave tanker owners and investors a “poke in the eye.”

“OPEC+ blindsided oil and tanker markets,” said ship brokerage BRS.

OPEC+ countries, led by Saudi Arabia, agreed to cut production by 1.6 million barrels per day (b/d) starting in May. Analysts say actual reductions will be around 1 million b/d, primarily affecting Middle East Gulf-Asia flows carried aboard very large crude carriers (VLCCs; tankers that carry 2 million barrels of oil).

Spot rates for non-eco-design VLCCs on the Middle East Gulf-China route were down to $56,300 per day on Tuesday, a plunge of $17,900 per day or 24% versus Friday, according to Clarksons Securities.

Omar Nokta, shipping analyst at Jefferies, said on Tuesday: “Charterers are not expected to begin booking May cargoes, which are set to be 1 million b/d below April volumes, until mid-April. Thus, the latest weakness in spot rates appears driven more by sentiment as opposed to imbalance brought on by the OPEC cuts.”

Tankers stocks predictably fell on Monday on the surprise OPEC+ news. Nordic American Tankers (NYSE: NAT) dropped 12%, DHT (NYSE: DHT) 11%, Frontline (NYSE: FRO) 10% and Teekay Tankers (NYSE: TNK) 9%. Tanker stocks stabilized on Tuesday.

OPEC+ decision: Symptom or disease?

As analysts and brokers weighed the surprise production cuts, a central question seemed to be: Was the OPEC+ move the symptom or the disease?

Was the cartel’s reaction a symptom of physical oil demand being weaker than widely believed, or did the cartel cut production to manipulate prices upwards due to its discomfort with sub-$80-per-barrel pricing, with the demand-rebound story still intact?

If the former, it’s negative for tankers. Weak demand always trumps a low orderbook, even a historically low orderbook.

If the latter, it’s still negative for tankers, but only briefly. It could lead to quicker rebalancing of oil supply and demand and a resumption of OPEC production, plus more fireworks on the Russia sanctions front.

Cuts are ‘inherently bearish’

The stated reason for the new cuts is that they’re “a precautionary measure aimed at supporting the stability of the oil market.” Brent crude had dipped under $73 per barrel in mid-March, in line with pricing in August 2021.

Evercore ISI oil analyst Stephen Richardson said in a research note, “Cuts are inherently bearish [for] fundamentals [because] OPEC sees more real-time demand and inventory numbers than the vast majority of market participants.”

The Wall Street Journal quoted Martijn Rats, chief commodity strategist at Morgan Stanley, as stating that OPEC’s decision “reveals something — it gives a signal of where we are in the oil market. Let’s be honest about this. When demand is roaring … OPEC doesn’t need to cut.”

Richardson said that “the trajectory of oil prices year to date has given investors pause.” The China post-COVID demand recovery has seen “a slower start” than expected, while “the build in OECD [Organization for Economic Co-operation and Development] inventories in the first quarter has been a point for concern.”

More Atlantic Basin crude to Asia

The consensus among tanker analysts and ship brokers is that the effect of the OPEC cuts will be limited, because the broader demand thesis — barring a banking-induced financial crisis or a global recession — is still intact.

Cuts are “not a game changer,” maintained Clarksons Securities analyst Frode Mørkedal.

Evercore ISI transportation analyst Jon Chappell said, “Barring a true global recession that changes the demand dynamic through 2024, the fundamental set-up still points to higher earnings, cash flow, asset values and dividends.”

According to Arctic Securities, “Unless the cuts prove to be driven by lower demand for oil, which we do not think is the case, we believe the impact should be limited to a correction and does not mark the start of a cyclical downturn.”

Multiple tanker analysts and brokers said that lost OPEC barrels would be replaced by Atlantic Basin supplies shipped to Asian buyers, increasing ton-mile demand (demand measured in volume multiplied by distance).

According to Mørkedal, “The distance between the U.S. and China is roughly twice that of the Middle East Gulf to China. As a result, an increase in U.S. oil exports of 500,000 b/d could potentially offset the impact of OPEC+ production cuts in terms of ton-mile demand.”

BRS said, “We believe that there should be increased demand for crude carriers, especially VLCCs, to undertake long-haul west-east voyages from the Atlantic Basin.”

Faster rebalancing of crude market

Another consequence of the OPEC+ cuts: The oil market should rebalance more quickly, leading to a faster rise in oil prices. If prices rise too high, it leads to demand destruction, so higher prices would eventually prompt a reversal by OPEC and increased production from its members, a positive for tankers.

Nokta cited pre-cut estimates from OPEC, the International Energy Agency and the Energy Information Administration that oil demand and supply would balance in Q2 2023 and demand would outstrip supply by 1.5 million b/d during the second half.

“With OPEC planning to take 1 million b/d offline starting in May, the market is poised to be undersupplied by 600,000 b/d during Q2 and by a significant 2.5 million b/d during the second half,” said Nokta.

This would lead to a significant decline in stockpiles in just a few months” and “bolster the potential for a more sustained output increase later this year,” he said.

BRS sees a deficit of 1.7 million b/d in supply versus demand in the second half, which “implies that [oil] prices could surge further from mid-year.” As a result, the brokerage expects OPEC to eventually hike production and that “the pessimistic outlook for Middle Eastern crude tanker demand should only last for two to three months before a rebound.”

Will Russian price cap come into play?

The prospect for higher oil prices in the second half — accelerated by the new OPEC+ cuts — raises questions on the price cap for Russian exports, which has been in place since Dec. 5.

So far, the G-7 and European Union price cap, now set at $60 per barrel, appears to be working. Russian crude has continued to flow but Russia is profiting less from its exports. Russian Urals crude oil trades at a steep discount to Brent crude, because there are effectively only two remaining buyers of Russian Urals: China and India.

However, if the price of Brent rises, it could pull Russian Urals above the cap, even with discounts.

Despite all the focus on the so-called “shadow fleet,” Lloyd’s List reported Friday that the majority of tankers carrying Russian oil are complying with the cap. Of 196 tankers loading in Baltic and Black Sea ports in March, 67% were insured by companies that required attestations that oil was being shipped below the cap price, Lloyd’s List said.

BRS warned that “Russian oil prices could exceed the price cap, leading to a further shut-in of Russian production if buyers refuse to exceed this cap.” An increased shut-in of Russian production could lead to higher prices — the very outcome the U.S. was seeking to avoid when it designed the cap system.

“The EU and G-7 retain the ability to raise the price cap if required, although we remain skeptical that this could be done quickly enough to head off a rally” in crude prices, said BRS.

Source: Freight Waves by Greg Miller