With the coronavirus pandemic playing havoc with the dynamics of the oil market, consultancy firm Drewry has warned that tanker rates ‘will hit the roof’ if oil producers outside the OPEC+ group do not curb their output.
In a statement issued yesterday (15 April), Drewry said that the ‘historic’ OPEC+ agreement to cut by 9.7 million barrels a day (b/d) in May-June will be ‘insufficient to balance the oil market’, considering a sharp decline of 23 million b/d in demand in the second quarter of this year because of the COVID-19 outbreak.
The OPEC+ production cut will taper to 7.7 million b/d the second half of this year before declining to 5.8 million b/d from January 2021 until March 2022.
Drewry commented: ‘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 million b/d (Y-o-Y) in April, which will lead to inventory build-up of over 28.7 million b/d 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 million b/d in May and 9 million b/d 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 the second quarter of 2020 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 the third quarter of 2020. 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, Drewry speculated that if countries outside the OPEC+ group did cut output by about 3.5 million b/d, the available spare onshore storage capacity would ‘probably manage to absorb excess supply from the market’.