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Business Last Updated: Dec 6, 2016 - 11:55:23 AM


Tanker earnings to be affected by OPEC cuts: A sector-by-sector breakdown
By Nikos Roussanoglou, Hellenic Shipping News 06/12/2016
Dec 6, 2016 - 11:54:15 AM

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Any decision which affects crude oil supply, let alone the first by OPEC after more than eight years is bound to have an effect on tanker earnings. But the hows, whens and which tanker segments will be the most affected is still up for question. In its latest weekly report, shipbroker Charles R. Weber noted that “the cuts are based on OPEC’s October production figures (based on secondary sources) and distributes cuts proportionally, calling for most members to trim their output by 4.6%, though Nigeria and Libya are exempted due to domestic security issues and Iran is permitted to increase its production by 2%. Indonesia, a net oil importer, suspended its membership. The deal also hinges on cuts from non‐OPEC producers of 600,000 b/d with half of that figure to come from Russia and the remainder yet to be disclosed. We note that OPEC quota compliance rates, historically low to begin with, had been falling before being targets were scrapped. Moreover, just days prior to OPEC’s meeting, Russia had been averse to imposing a cut on its production, favoring a freeze instead which, it said, represented a cut relative to its plans for 2017”, said CR Weber.

“Given that 78% of the cuts are distributed to the Middle East region, the implications are notionally negative for the VLCC workhorses of that region’s exports, though this could actually prove beneficial to VLCC demand by prompting greater purchases of West African crude by Asian buyers. Angola’s 50,000 b/d cut is relatively small compared to offline Nigerian production poised to come back on stream during 2017. During October, Nigeria’s production rate was 157,000 b/d below 1Q16 and 237,000 b/d below 2015 (using the same OPEC production data as that applicable to the OPEC deal). If Asian buyers source just nine additional VLCC cargoes per month from West Africa as a result (representing a replacement of just 64% of volumes lost in the Middle East), due to longer voyage durations, total round‐trip VLCC employment days associated with Asia‐bound trades could rise by around 8.7%. Elsewhere, we note that Venezuela’s cuts (which were likely to occur on the basis of directional production declines) are unlikely to alter crude flows to China as part of normal trades and oil repayments for development loans, relative to our prior base expectation. Floating storage could also come into play, provided that market participants are able to observe cuts being adhered to, raising a short‐term contango structure for the remainder of the six‐month term of the current OPEC agreement”, said the shipbroker.

 

Suezmax Demand

According to CR Weber, “oil price support corresponding to the OPEC agreement could set the stage for a modest rebound in domestic US production, contributing to expected regulatory support for E&P from the upcoming Trump administration. Moreover, since the deal was announced, Brent prices have experienced greater gains than WTI prices; assuming such a structure holds, this could increase incentives for US refiners to increase their sourcing of US crude and reducing the modest increase of imports from West Africa observed in recent months. This would suggest a negative for Suezmax demand on the trans‐Atlantic route. More importantly, while refining margins have experienced some immediate‐term support from the deal – largely due to refiners benefiting from inventories built at pre‐deal prices – the same headwinds for refiners are likely to remain during the coming months, potentially some of the much‐awaited refining capacity rationalization in Europe to come to fruition, which would detract from Suezmax demand on routes from West Africa to Europe. Meanwhile, production losses in the Middle East market could hit regional Suezmax demand harder than VLCC demand by trimming voyages to Asia and to Europe (the latter of which having experience a 77% YTD, y/y increase), with little potential for a geographic reorientation of trade routes to benefit ton‐miles similarly to VLCCs”.

Aframax Demand

The shipbroker added that “supply cuts in Latin America, North Africa and Russia (across its Baltic, Black Sea and Asia export areas) are likely to impact Aframax‐favorable demand, though Panamaxes are likely to feel the brunt of Ecuador’s estimated 25,000 b/d cut. However, Libya is targeting a 2017 production increase which exceeds the sum of production cuts in the three aforementioned regions, relative to its October production rate – which itself marked a 168,000 b/d gain from September – following a recent agreement between the state‐run National Oil Corp. (NOC) and the armed forces controlling the country’s key oil ports of Ras Lanuf and Es Sider. If this agreement holds, enabling oil exports as per NOC’s plans, it should go some way in offsetting the impact on Aframax demand. Additionally, the potential for US crude exports to post further gains could also contribute a measure of replacement Aframax demand”.

Earnings

In terms of tanker earnings, CR Weber notes that “with projected 2017 fleet growth levels already set to exceed our base demand growth case, adherence to the OPEC agreement presents an additional challenge to fundamentals. Our Suezmax and Aframax fleet net growth projections for 2017 stand at 10.6% and 7.5%, respectively, up from projected 2016 net growth of 5.5% and 4.3%. Meanwhile, VLCC net fleet growth is projected to decline from 2016’s rate of 6.9% to 5.3%. Moreover, across the three classes, 2017 deliveries heavily centered to Q1, implying a quick hit to earnings from early during the year on a supply basis – and the disadvantaged nature of newbuildings on their first trades weigh even more heavily on rates than fleet numbers suggest by offering charterers with more competitively‐priced units. Though we view Suezmax fundamentals as the most vulnerable, given the class’ ability to compete with both Aframaxes and VLCCs, negative earnings pressures are likely to be more evenly distributed”.


Source:Ocnus.net 2016

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