The last twelve months have been a rollercoaster ride for oil markets and tanker owners, and the surprises continue. Yesterday, OPEC and its allies, the so-called OPEC+, agreed to leave their production cuts essentially unchanged in April. Barring Russia and Kazakhastan, who have been allowed to increase production by 130 kbd and 20 kbd respectively, other participating countries will hold production at current levels in April. There was no firm commitment for ending Saudi Arabia's 1 mbd voluntary cuts, as the kingdom's representative said that it was in "no hurry" to end the voluntary cuts, indicating that the 1 mbd voluntary cuts would remain largely unchanged in April. The group has decided to meet again on 31 March and 1 April to decide production levels for May and possibly June.
How does this change our Base Case view?
In a nutshell, not much. Our Base Case view that tanker rates will continue to remain weak in 21Q2 and 21Q3, before gathering momentum in 21Q4, remains virtually unchanged. Although we, like most market watchers, were expecting OPEC to release some withheld barrels in April, this unexpected outcome of the meeting is likely to have only a minimal impact on rates and prices compared to our 21Q1 base case forecast released last week. Holding back production in April will mainly result in faster inventory drawdowns for the month. Going forward, we still expect OPEC to increase production in line with increasing oil demand, starting in May, with the cartel’s output seen rising by almost 2 mbd by the end of the year from the February levels.
Oil prices, bunker prices and eco-premiums
However, OPEC+'s decision will affect oil prices, which were hovering around $65/bbl recently, mainly driven by Saudi Arabia's unilateral 1 mbd cuts and production outages in the US because of unexpectedly cold weather. The OPEC+ decision should result in a tighter oil market and push oil prices up further, resulting in bunker prices moving up in the short term, which should help eco premiums. Indeed, over the past two months, VLSFO bunker prices have risen from $410/tonne to nearly $500/tonne, with the VLCC eco-premium increasing from $5,000 per day to $6,000 per day as a result.
All in all, OPEC+'s surprise decision to hold back production for one month is likely to have minor short-term effects on the tanker market with a minimal impact on tanker rates and prices relative to our Base Case. If the OPEC+ production restraint were to last longer, it could result in a tighter oil market, with oil prices rising further and US shale production coming back faster than in our Base Case. We will discuss our tanker market outlook in more detail in our April eBrief, which is scheduled to be published soon after the next OPEC+ meeting on 1st April.