Increased OPEC Output Likely To Keep Tanker Rates High In 2005 Q2

- By Kevin Hazel, March 21, 2005

Late last week, OPEC agreed to raise its production target by 0.5 mbd, beginning in April.  The new target is 27.5 mbd, excluding Iraqi output.

To put this in perspective, we estimate that OPEC crude output averaged 29.4 mbd in the first two months of 2005, including Iraqi production of nearly 1.9 mbd.  Thus, non-Iraqi output has already been running at about 27.5 mbd.

However, in lieu of this recent announcement, we expect a further increase in OPEC production during the next few months, with output likely to move back up to 30 mbd over the next few months.  With global oil demand continuing to grow at a strong pace, and with oil prices surging above $50/bbl recently, the cartel’s members certainly have every incentive to increase production.  Indeed, last week’s agreement also allows a second 0.5 mbd hike  in output in the near-future if prices remain high.

In practice, this is likely to mean higher output from Saudi Arabia, where at least 70% of OPEC’s spare capacity is located, excluding Iraq.  And this increase in long-haul shipments should give the tanker market yet another shot in the arm, helping to keep freight rates relatively high through the second quarter. 

Specifically, we see tanker demand rising slightly above its late 2004 peak in response to the anticipated increase in OPEC output.  However, freight rates are not expected to return to their astronomical fourth quarter levels, since the tanker fleet has expanded by more than 3% over the past six months.

Nevertheless, our forecast has been raised relative to the  main case scenario discussed in our February eBrief.  Indeed, rates have already increased during the past week, and we generally expect them to remain firm for the next few months.  During the second quarter, we expect VLCC earnings for an AG/East voyage to average $75,000 per day; with Suezmax rates for a West Africa/US voyage averaging $58,000 per day; and Aframax earnings for a Carib/US voyage averaging $40,000 per day.  Product tanker rates should see less of an immediate impact from OPEC’s decision, with earnings for a Carib/US clean voyage averaging $24,000 per day in the second quarter.

In the second half of 2005, we expect OPEC crude output to rise further, topping 30.3 mbd by the fourth quarter.  This should lead to further gains in tanker demand, but we still expect the tanker fleet to expand at an even faster pace.

Although tanker scrapping is projected to total nearly 11 million dwt over the remainder of 2005, with the early April deadline for single-hull tankers without segregated ballast tanks playing a significant role in boosting likely demolition activity, tanker deliveries are projected to exceed this by a 2-1 margin.  We expect deliveries to total 23 million dwt over the same period, leading to fleet growth of nearly 4% over the next nine months.

Consequently, we still expect tanker spot rates to fall back moderately in the second half of the year.  The details of our revised forecast will be discussed in our March eBrief, which will be distributed in the next week or so.