Trying to make sense of it all

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Is the abundance of crude that triggered the collapse in oil prices, which undoubtedly offered multiple benefits to tanker markets since late 2014 set to end or will it continue?

 

Last weekend’s Doha meeting seemed to have broken up in disarray, as neither the Iranians or the Libyans attended, while Saudi Arabia tried to cap Iran’s output.  

The cheap oil increased seaborne trade to existing and new markets, supported land based commercial and strategic storage, while increased price volatility and stimulated arbitrage driven shipments.

At the same time, excess crude supply not only elevated floating storage (mainly for operational reasons) but also translated into delays and inefficiencies in the supply chain, London brokers Gibson said in a report written just before the meeting.

Finally, owners were able to take advantage of lower bunker costs.

The prolonged period of low oil prices hurts both OPEC and non-OPEC producers alike. US crude output is being hit the hardest and production started to decline during the middle of last year.

The latest EIA projections - again released before the meeting - are for total US crude output to drop by over 0.8 mill barrels per day this year and by around 0.55 mill barrels per day in 2017 to just over 8 mill barrels per day.

Although so far only modest changes in production were seen in other non-OPEC countries, major cutbacks to oil company CAPEX will apply the breaks on future potential. There is also considerable pressure on budgets of producing countries where revenues from oil sales are used to finance fiscal policies.

Although US crude output is falling, global production is at or close to record high levels.

Last January, when Iran’s nuclear sanctions were lifted, authorities in Tehran claimed that the country’s crude output will increase by 0.5 mill barrels per day within weeks and by another 0.5 mill barrels per day during the following six months.

The reality is somewhat different, as the IEA estimated that Iranian crude production was at 3.3 mill barrels per day in March, up by 0.3 mill barrels per day from January. The volume of Iranian crude/condensate in floating storage also remained at high levels. In fact, the number of VLCCs used for storage of Iranian barrels increased modestly by the end of March, relative to January estimates.

Despite these developments, Iranian crude production is still expected to continue to rise throughout 2016, although the pace of growth could be limited.

For the tanker markets, any freeze or even a rise in production would mean more demand. It would also mean that delays and inefficiencies the industry is now facing are unlikely to fade overnight, Gibson concluded.

Initial reaction to the Doha meeting was that by breaking up without an agreement to freeze production, this can only be good for the tanker sector.