VIENNA, June 2, 2016 (Xinhua) -- Qatari Oil Minister Mohammed bin Saleh al-Sada (C) receives interviews before the 169th meeting of the OPEC conference in Vienna, capital of Austria, on June 2, 2016. (Xinhua/Qian Yi)
The next OPEC meeting due on 22nd June is shaping up to be one of the more significant gatherings.
Discussions will centre around whether to maintain production cuts or increase production. Naturally, the tanker market is hoping for production increases, Poten & Partners said in a comment.
Since the current production restrictions came into effect in January, 2017, oil prices have increased from $55 to $80 per barrel for Brent. US Commercial inventories have come down by 100 mill barrels from a peak of 534 mill in April, 2017 to around 436 mill barrels in the first week of June, 2018.
While these two elements seem to indicate that the OPEC cuts have achieved their objective, it remains highly uncertain what OPEC (and non-OPEC participants, like Russia) will ultimately decide to do. The tanker market is holding its collective breath.
A meaningful increase in long-haul flows from some of the key OPEC exporters would go a long way in turning the crude tanker market around, especially since it will impact the physical market, as well as provide a boost to the all-important market psychology.
While the production cutbacks and resulting oil price increases seem to have turned OPEC members finances around, some countries are benefiting more than others.
Revenues declined by an average of 45%, before the cuts. As the largest OPEC producer and exporter, Saudi Arabia suffered the most. The value of the Kingdom’s petroleum exports dropped from $284 bill in 2014 to $153 bill in 2015, so it was no surprise that OPEC decided in 2016 that it needed to curtail production.
This led to a significant recovery in price, which boosted the revenues for all OPEC members. However, the total value of exports remains significantly below the 2013/2014 numbers.
The different OPEC members paths may diverge from here. Sticking to the production agreement may lead to higher oil prices and this will further improve OPEC’s finances. However, the world economy is not immune to higher oil prices and pressure from the US on OPEC is building to increase production.
Unfortunately, while higher prices help all OPEC members (at least in the short term), a production increase will only benefit the countries with spare capacity (ie, mostly Saudi Arabia).
Not surprisingly, Venezuela and Iran would rather keep the production cuts in place, as neither country has much, if any, spare capacity and both are facing US sanctions, which could lead to further reductions in output. Iran’s exports will be facing challenges when sanctions start to bite in November.
What are the possible scenarios for the tanker market? The worst case would be a decision later this month to do nothing, ie continue the production cuts. This will lead to rising prices, as problems in Venezuela continue to mount and many Iranian buyers gradually start to reduce their purchases to avoid US sanctions.
As we move closer to the November cut off, Iranian exports may decline further.
A tightening oil market in combination with rising geopolitical tension could push oil prices to levels where it starts to impact global demand. Rising US oil production is a positive for global oil balances, but, due to a lack of pipeline capacity, US shale producers are facing increasing problems getting their product to (export) markets.
The best-case scenario for the tanker market would be a decision by OPEC to boost output, mainly from producers in the Middle East (Saudi Arabia, UAE, Kuwait). Combined with Iranian sanctions and more floating storage, this could reverse the decline in OPEC-related tonne/mile demand that resulted from the production cuts in 2017.
Falling oil prices may provide an additional boost to tanker demand as it stimulates oil demand growth and stock building. We don’t know what will happen, but we do know what tanker owners are hoping for, Poten concluded.
Some analysts are already predicting a rise in production at next week’s meeting - Ed.