Argus Media Limited

10/05/2021 | News release | Distributed by Public on 10/05/2021 11:51

Opec+ output hike not the spark VLCCs need

The Opec+ alliance's decision yesterday to increase its collective crude production quota by 400,000 b/d next month is unlikely to provide impetus for a sustained recovery in rates for very large crude carriers (VLCC).

As the largest tanker class the VLCC market is the linchpin for the entire crude tanker complex, creating top-down pressure on the smaller segments. So a recovery in the broader tanker market can only arise from a sustained rebound in VLCC rates. These have been under pressure throughout most of this year, albeit they hit a recent 2021 high - but the outlook remains clouded.

Although any additional crude output from Opec+ countries will buoy tanker demand somewhat, only around 55pc of the group's exports have been carried on VLCCs so far in 2021, according to Vortexa. So even assuming all of next month's increase goes to seaborne export markets, this only translates to around one additional VLCC cargo every 8-10 days.

The producer group made its decision in the face of calls - most notably from Washington - for it to consider restoring production more quickly than planned, because of rising oil prices. And a question mark hangs over how much additional output will actually result. Several Opec+ ministers and delegates have warned in recent months that some member countries may struggle to deliver their share of the monthly output increases because of short-term infrastructure issues or longer-term field decline.

This is true of Nigeria and Angola, which are the largest exporters of crude on VLCCs from west Africa, a significant route for tanker tonne-miles because it is much further away than the Mideast Gulf from the major demand centres in India and Asia-Pacific. A laden VLCC takes around 33 days to get from Bonny, Nigeria, to Ningbo, China, at 13 knots, compared with just over 19 days from Basrah, Iraq, to Ningbo, according to Vortexa.

But Opec+ has increased the quotas for Nigeria and Angola in November by only 18,000 b/d and 14,000 b/d, respectively, not enough to add even one extra VLCC between them each month even if both countries meet the full increase.

Research and advisory firm McQuilling Services said the cautious approach adopted by Opec+ could lead to further inventory drawdowns, which would boost tanker demand as these are replenished. But this could be offset by the release of VLCCs being used as floating storage. Vortexa data show 15 VLCCs globally have been storing crude for 30 days or more.

The Opec+ group's conservative approach may encourage higher exports from producers outside the coalition such as the US - a VLCC takes around 49 days from Corpus Christi to Ningbo. But US shale producers have been cautious about raising production this year.

And the Covid-19 pandemic continues to cloud the VLCC market. Opec+ said the outlook for crude demand in the first quarter of next year is uncertain.

By Saleem Rizvi