In International Shipping News 17/04/2020
T
he recent cut in oil production by OPEC and its non-OPEC allies (OPEC+) is insufficient to balance the oil market, considering a sharp decline of 23 mbpd in demand in 2Q20 because of the COVID-19 outbreak.
OPEC+ has finally managed to reach a historic agreement to cut production by 9.7 mbpd in May-June 2020. The production cut will then taper to 7.7 mbpd in 2H20 before finally declining to 5.8 mbpd from January 2021 until March 2022. As major oil producers outside OPEC+ have refrained from any official commitment to cut production, the extent of oversupply in the market will hinge on the organic decline in unconventional oil production in the US and Canada.
According to IEA, oil demand will decline 29 mbpd (Y-o-Y) in April, which will lead to inventory build-up of over 28.7 million bpd before the production cut begins on 1 May. This oversupply will boost onshore stocking activity, commercial as well as SPR build-up, supporting tonnage demand in the crude tanker market.
But if oil production outside OPEC+ fails to observe a significant decline in production, the market will be in surplus by more than 20 mbpd in May and 9 mbpd in June, despite the production cut by OPEC+.
In such a scenario estimated spare onshore storage capacity of about 1-1.3 billion barrels at the beginning of 2Q20 will be exhausted by the end of May. This, in turn, will inflate the demand for floating storage towards the end of the quarter and surplus oil will absorb about 4-5 VLCCs per day in June. Additionally, as oversupply will cap any surge in oil prices in 2Q20, most of the 55 VLCCs and 24 Suezmaxes currently locked in floating storage are unlikely to return to active trade before any possible recovery in oil demand and prices in 3Q20. In such circumstances freight rates in the crude tanker market will hit the roof, as a rise in floating storage will squeeze tonnage supply even further.
However, if oil production in countries outside OPEC+ declines by about 3.5 mbpd and countries such as South Korea, India, China and the US increase SPR by around 200 million barrels, the available spare onshore storage capacity will probably manage to absorb excess supply from the market. In this proves to be the case freight rates in the crude tanker market will decline significantly in May-June from current levels.
Source: Drewry
