Tanker market anxiously waits for Trump to show cards on Iran

Although, non-OPEC production is surging with the rise in US production, the market will still be in tight supply over the next three quarters if OPEC keeps its production at March levels. Even in the absence of sanctions, the call on OPEC crude and stock change for the remainder of the year will be about 0.6 mbpd higher than OPEC’s March production levels of 31.8 mbpd not-withstanding the rising US-led non-OPEC production. In 2019 the situation should ease as further gains in US production will bring down the call on OPEC crude.

So, if Iranian output falls by 1.0 mbpd, it will be difficult to bridge potential shortages of close to 1.5 mbpd in the second half of 2018 and 0.9 mbpd in 2019 without OPEC’s support, as most of the non-OPEC producers are already pumping at full throttle.

Theoretically OPEC producers (excluding Iran) have more than enough spare capacity (3.4 mbpd) to fill the possible void created by Iran sanctions. The majority of this spare capacity lies with Saudi Arabia and other Middle Eastern producers.

So if Middle Eastern OPEC producers ramp up production to fully compensate for any decline in Iranian supply, the sanctions will have no impact on oil trade and tanker demand as lower Iranian exports will be counterbalanced by higher exports from the other Middle Eastern producers.

However, if cartel doesn’t compensate fully for the possible Iranian production decline, the market will be in deep trouble, as the gap will have to be met by inventory drawdown, which in turn will curb trade by an equivalent volume.

In this scenario we could see a decline in seaborne crude oil trade close to 50 million tonnes (equivalent to 2.2% of 2017 trade). Or put another way, 15-20 VLCCs, could be without employment.