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Drewry Maritime Advisors
Maritime Research

Production cut by OPEC and allies unlikely to hurt crude tankers

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A sharp decline in prices as well as mounting pressure of oversupply has forced OPEC and its allies to cut production. However, crude tanker demand is unlikely to be affected, as a notional loss in the volume of crude oil trade owing to the production cut will be more than compensated by the expected surge in long-haul exports from the US to Asia.

OPEC’s balancing act

OPEC and Russia-led non-OPEC crude exporters have decided to slash crude production by 1.2 mbpd from October 2018 levels until the first half of 2019. The decision will however be reviewed in April 2019.

While OPEC producers will reduce their output by 800 kbpd from 32.9 mbpd in October, with non-OPEC producers making up the balance. Although there is no specific quota for OPEC members, most of the cartel’s production cut will be made by Middle Eastern members, especially Saudi Arabia. Libya, Venezuela and Iran have been exempted from the cut, while the non-OPEC cut will be driven by Russia, which will tribute 50% of the 400 kbpd reduction.

 

Why the 180-degree turn in OPEC’s case?

Earlier, in its June 2018 meeting, OPEC decided to increase production to cope with the decline in output from Iran and Venezuela. The cartel ramped up its output to 32.9 mbpd in October, ahead of the deadline for the US sanctions on Iran. However, after the US granted a waiver to eight countries which enabled them to continue importing Iranian crude until May 2019, Brent prices plunged below the $60 per barrel mark in November. As non-OPEC production is expected to surge in 2019, the call on OPEC crude for a balanced market is expected to be 31 mbpd in the first half of 2019, about 1.9 mbpd lower than the cartel’s October 2018 output.

 

Figure 1: Oversupply forces OPEC to cut production—reversal in trend from 2017 levels

Figure 1: Oversupply forces OPEC to cut production—reversal in trend from 2017 levels

Figure 2: OPEC crude production and estimated demand

Figure 2: OPEC crude production and estimated demand

Crude tanker trade to remain unaffected

The production cut is unlikely to affect the crude tanker market as the oil market will be well supplied. Even a notional loss in the volume of crude oil trade will be more than compensated by the expected surge in tonne-mile demand because of increased long-haul exports from the US to Asia.

 

In the absence of a production cut, oversupply would have led to either stocking in key demand hubs (supportive for trade) or inventory build-up in production hubs (neutral for trade).

 

Assuming oil demand is not affected by the production cut, most of the lost Middle Eastern supply to Asian markets will be replaced by US crude. In short, all the gains in non-OPEC production in 2019 will come from the US. As the distance between the US and Asia is almost double that between the Middle East and Asia, tonne-mile demand will more than compensate for any notional loss in crude oil trade volumes.

Key Contacts

Rajesh Verma

Rajesh Verma