Crude tanker market hit hard by OPEC cut

5th-Crude tanker market hit hard by OPEC cut

The predicted influx of new tonnage, combined with the Organization of the Petroleum Exporting Countries’ (OPEC) production cap and lower levels of refinery throughput are hitting crude markets hard, according to Maritime Strategies International (MSI).

Namely, the crude tanker market is set to go through a testing time over the period of the next six months, and perhaps longer if OPEC is successful in extending production cuts beyond the first half of 2017.

The VLCC and Suezmax markets moved downwards in January, with spot rates sliding rapidly from a seasonally strong December. Pressure has persisted in these sectors in February leaving the crude tanker spot market under increasing strain.

More mixed dynamics and volatile conditions characterised the Aframax and product tanker sectors in January, but in both segments resistance to the current downturn in spot rates has been limited and in February conditions across the tanker market sector are poor and deteriorating, MSI informed.

“OPEC is one clear culprit behind the downturn, with compliance to committed cuts estimated at close to 90% so far in January, another is the huge amount of refinery maintenance scheduled to occur in the near-term,” Tim Smith, MSI Senior Analyst, said.

“We are likely to see a peak of close to 6 million bpd of capacity offline around the end of Q1 and start of Q2, implying that overall crude import demand will be weak over the next three months exacerbating the effect of the OPEC cuts,” Smith added.

OPEC’s next test will be resisting output increases beyond this period of refinery maintenance when underlying demand rebounds. The second half of the second quarter is “likely to be pivotal for the tanker sector,” but with some OPEC members already calling for even deeper cuts, MSI said that it does not foresee major upside in the near-term.

This view is being reinforced by high rates of fleet growth as twelve VLCCs are estimated to have hit the water in January, increasing fleet capacity by 1.6% in a single month. Crude carrier deliveries will continue to be frontloaded in 2017 as a surge in Suezmax deliveries hits the water over the next three months with around 20-25 deliveries expected.

“With a combination of OPEC cuts, low refinery utilisation and continued influx of new tonnage, the fundamentals for the crude market do not look constructive over the six-month horizon,” Smith said, adding that MSI expects spot market conditions to remain weak.