Extended production cut by OPEC and dwindling Iranian exports threaten to negate seasonal firmness in tanker market, according to shipping consultancy Drewry.
The oil market has been highly volatile in 2019 on account of uncertain supply. Although Drewry expects growth in non-OPEC oil supply to be higher than growth in global demand in 2019, US sanctions on Iran and Venezuela and OPEC’s market management have made oil prices very unstable.
Heightened tension between the US and Iran after the recent attack on oil tankers near Strait of Hormuz has also helped to underpin prices.
Nevertheless, the current backwardation in oil prices suggests that despite the supply cut by OPEC, supply glitches in Venezuela and the US sanctions on Iran, the global oil market will be well supplied in the second half of 2019.
According to crude oil futures prices, the anticipated surge in non-OPEC production, along with the negative impact of the ongoing US-China trade war on demand, will keep the market well supplied, which bodes well for the tanker market.
However, despite strong growth in non-OPEC production, the oil market could be in short supply in the second half of 2019 if US sanctions reduce Iranian crude exports to zero. In June 2019 Iranian crude exports were 0.3 mbpd, compared with 2.5 mbpd in April 2018 just before the imposition of the sanctions.
Drewry said that if the 11 members of OPEC which have agreed to cut production, keep their collective output around the agreed 25.8 mbpd levels in the second half of 2019, and Venezuela and Libya maintain their output around current levels of 0.8 mbpd and 1.16 mbpd (recorded in May 2019) respectively, the oil market will be in short supply in the second half of 2019.
“Our estimates suggest that in these circumstances the oil market would see a drawdown in crude oil inventory to the tune of 1.2 mbpd in the third quarter of 2019 and 330 kbpd in the fourth quarter of 2019. Therefore, the tightness in supply and the corresponding inventory drawdown would have a negative impact on tanker demand (especially VLCCs) and would go some way to negate the normal seasonal upturn,” Drewry explained.