Tankers Update : OPEC+ cuts and the influence on VLCC’s
OPEC+ oil production cuts typically have a dampening effect on the VLCC market given that they are concentrated on Middle East crude supply. The most recent agreement for a reduction in output of 2.2M b/d from 1Q24 may be no exception if the voluntary cuts offered by member countries are implemented. Saudi Arabia is to maintain its 1M b/d reduction from 2H23 into next year and Russia is to deepen its supply cut of 300K b/d to 500K b/d, with crude exports accounting for 300K b/d. Voluntary cuts by other members (Kuwait, UAE, Iraq, Oman, Kazakhstan & Algeria) amount to almost 700K b/d.
The extension of Saudi Arabia’s supply cuts from 2H23 into 1Q24 alongside the sustained growth in non-OPEC+ output – concentrated this year in the Atlantic Basin amongst US and Latin America producers – almost maintains the current oil supply fundamentals. But for the tanker market, some of the rate direction in early next year will be dependent on how much other OPEC+ producers stick to their additional voluntary cuts, therefore trimming cargo volumes.
Yet while Middle East supply cuts are negative for VLCC cargo volumes – and Middle East VLCC loadings have fallen over the course of 2023 after Saudi Arabia implemented its unilateral additional cut in July – they have been partially offset by an increase in Atlantic Basin VLCC demand. Some refiners have had to switch to alternative suppliers to fulfil their crude reductions from the MEG. And this has been positive for VLCC tonne miles, especially as Asian refiners have sought more Atlantic crude, such as from Brazil and the US, where VLCC cargo counts have picked up again in 2H23.
Currently, the spread between the futures price of Brent and Dubai is narrow, and at times over the past month or so, Brent has traded at a discount to Dubai, so making Atlantic crude more attractive to Asian buyers over Middle East oil. As we head into next year, If the demand for Atlantic crude from Asian refiners is there, and given the favourable pricing, this should create underlying support for the VLCC market in the face of extended OPEC+ cuts.
Still, broader market fundamentals also need to be considered, such as the refiner demand, especially from Asia. China’s crude imports have been easing in recent months, likely a consequence of refinery throughputs pulling back from record highs in recent months amidst falling margins and a lack of refined product export quotas as well as utilising previously built domestic crude stocks when oil prices had crept higher. More widely, refining margins have also eased in other parts of Asia, potentially curbing their crude demand, which may weigh on VLCCs.
By Jamie Rustom, Senior Director, Tankers, London.