In response to the ongoing Venezuelan oil workers strike, OPEC has agreed to increase its quota to 24.5 mbd, beginning in February of 2003. This will most likely lead to a continuation of the recent boom in large tanker rates, although much still depends on what is going to happen in Iraq during the next couple of months.

Although the strike in Venezuela has caused oil prices to rise above $30/bbl, and has had a negative effect on the demand for Aframaxes in the region, the overall impact on the tanker market has been positive, and it is likely to continue to be so for several months, even if the strike is settled in the next few weeks. The reasons for this are three-fold:

• First, roughly 60% of Venezuela’s 2.8 mbd of exports was going to the U.S., and given the very short distances involved in this trade, it generated a relatively small amount of tonne-mile demand. With much of the replacement for this oil now expected to come from the Middle East over the next couple of months, tonne-mile demand will get a huge boost.

• Second, there are reports that some Venezuelan oil fields may have been damaged as they were shut down, and it is also likely that significant personnel changes will take place when the strike ends. Accordingly, it is expected to take several months before production returns to its pre-strike level.

• And finally, the loss of Venezuelan supplies has caused global oil inventories to fall towards the low end of the historical range. Therefore, even when the strike ends, there may be a need to rebuild inventories. If Venezuela is unable to increase production rapidly, this will most likely lead to higher levels of Middle East oil production than would have been seen if the strike was settled quickly.

From the tanker market’s perspective, the biggest beneficiary of OPEC’s decision to increase production is likely to be the VLCC sector. With spare capacity pretty much limited to Saudi Arabia and the United Arab Emirates, we should see a jump in VLCC demand over the next couple of months.

Suezmaxes are likely to benefit indirectly, as VLCCs shift out of the West Africa region to take advantage of the extra cargoes coming out of the Middle East. Aframaxes will also get an indirect benefit, as some VLCCs may leave the North Sea region, but the lower volumes of oil moving out of Venezuela will most likely keep a cap on Aframax rates in the Caribbean.

It is worth noting that the boom in rates is still likely to subside by the middle of 2003, as the eventual return of Venezuelan supplies will probably lead to a modest reduction in longer-haul Middle East supplies, in order to keep oil prices near $25/bbl. In addition, we expect the tanker fleet to grow by about 4% this year, which will make it hard to sustain rates at their recent levels.

But for the next couple of months, rates for the larger tankers should be extremely high, with VLCC spot earnings remaining in excess of $70,000 per day and Suezmax rates averaging close to $40,000 per day. Aframax and product tanker rates should see smaller benefits, averaging about $30,000 per day and $20,000 per day, respectively.

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