The VLCC tanker market is facing intense headwinds so far in the year. In its latest weekly report, shipbroker Gibson noted that “undoubtedly, the OPEC led production cuts are having negative implications for crude tankers, particularly VLCCs. Although no major changes have been seen in the absolute volume of spot VLCC fixtures out of the Middle East, this coupled with the ongoing rapid expansion of the trading fleet, forced spot earnings down to around $17,500/day in recent months, from over $40,000/day at the start of the year. In contrast to the developments in the crude tanker segment, so far to date the impact of production cuts on oil markets has been rather muted. Although global OECD oil stocks have moved to lower levels relative to the five-year averages, they still remain at highly elevated levels. The biggest challenge to OPEC’s strategy is recovering US crude oil production. According to the EIA, US crude production averaged at 9.2 million b/d in June, up by over 0.65 million b/d from the lows seen in September 2016. Crude output is anticipated to rise by a further 0.55 million b/d by December 2017”.

According to Gibson, “recovering Libyan and Nigerian production are also diluting OPEC’s effort to rebalance the market. Last month Libyan output was assessed by the IEA at 0.82 million b/d, up by nearly 0.55 million b/d from the lows seen in August 2016. The latest indications for the country’s production are around 1 million b/d, while the Libyan National Oil Corporation targets a further 0.25 million b/d gain to 1.25 million b/d by the end of the year. The gains in Nigerian crude output are also impressive. In June production climbed close to 1.6 million b/d, up by around 0.45 million b/d from August 2016 levels. If the relative stability seen in recent months remains in place, further gains could be achieved in the 2nd half of this year. The ongoing rebound in Libyan and Nigerian production has prompted a discussion as to whether supply caps should be introduced for these countries or alternatively whether a flexible approach should be employed by other producers participating in output cuts to accommodate rising production from the exempt countries. However, both Libya and Nigeria indicated their unwillingness to cap, while further cuts would require a great deal of cooperation. Yet, if additional cuts are agreed and implemented, this will serve another blow to crude tanker demand this year”.

The London-based shipbroker added that “an equally important question is what will happen in 2018 when the current deal expires? Will we see a rebound in the Middle East crude exports, so much needed by the weak tanker market? The IEA expects to see a healthy growth in world oil demand at 1.4 million b/d; however, further gains are projected in non-OPEC supply. By far the biggest increase is anticipated in US oil production, which is forecast to rise year-on-year by 1.05 million b/d. Smaller gains are also expected elsewhere, most notably in Brazil, Canada and the UK, together accounting for a further 0.6 million b/d increase. Although output in a number of other countries is expected to see a minor decline, the overall picture is that all of the forecasted increase in demand is likely be met by increases in Non-OPEC supply (crude, NGLs, biofuels, processing gains). If the forecast is correct, this leaves almost no scope for increases in OPEC crude output in 2018 from current levels. If OPEC decides to abandon its restraint, there is likely to be another build in global inventories and further downward pressure on oil prices. The dilemma faced by OPEC does not inspire much optimism for the crude tanker market, hoping to see increases in Middle East crude exports. If production cuts are extended through 2018, the only hope for owners will be continued strong gains in long haul trade, persistent floating storage and slowing fleet growth”.

Meanwhile, in the crude tanker market this week, Gibson said that “very easy looking VLCC lists lended Charterers the necessary comfort to keep the market pace at ‘dead slow’ despite having full August programmes in hand. Owners held the line as best they could, but the bottom of last week’s rate range became the top of this week’s with now lows of ws 45 and highs of ws 50 to the East the new norm and mid ws 20’s available to the West. Perhaps a bit busier next week, but no sea-change likely. Suezmaxes picked up their pace a little, but to no more than a slow trot and rates struggled to break through ws 70 to the Far East with around ws 30 the ceiling to the West, though Kharg liftings still command reasonable premiums. Aframaxes quietened as the week wore on and rates slipped to 80,000mt by ws 87.5 to Singapore with ‘bottom’ still to be found”.