OPEC Cutback Deal May Be a Windfall for Struggling Global Shippers: Broker

Friday November 10, 2017

U.S. ship brokerage Charles R. Weber on Thursday speculated that the strong compliance for the Organization for the Petroleum Exporting Countries (OPEC) production cuts is boosting prospects for business for struggling shippers such as Frontline Ltd., Euronav, and Gener8 Maritime, which are still recovering from five years of weak rates and falling profits.

That's because the cuts are raising demand for previously little-used U.S.-Asia routes and allowing tankers to refill in the Gulf on return journeys to the U.S.: "The impact of rising Asian demand will not be seen in strong earnings in the next two quarters, because there is still the problem of overcapacity," said George Los, head of tanker research at Charles R. Weber.

He added, "But by mid 2018 and by 2019 it will be able to make a notable impact on VLCC (Very Large Crude Carrier) rates."

China is importing about 115,000 barrels per day (bpd) from the U.S. through September this year, up from under 1 million barrels between January and August a year ago; and India earlier this year said it would buy crude from the U.S. for the first time.

Reuters notes that the rate to transport U.S. crude oil from the Gulf of Mexico to Singapore TD-LPP-SIN  has risen over 50 percent since August and is now $15.54 per tonne, while prices for the more traditional Middle East to Asia route are also up nearly 48 percent; Reuters added that volumes for the U.S.-Asia route nearly tripled to 5 million barrels in September since the beginning of 2017.

Brian Gallagher, spokesman for Euronav, said, "As this trend for U.S. exports to the Far East grows, the positive impact on our business will be felt in the second half of 2018 and beyond."

But the market changes influenced by OPEC could easily change again for the worse in the near term, warned Fereidun Fesharaki, chairman of industry consultant FGE.

Although he wasn't discussing shipping, Fesharaki suggested that those benefiting from the cartel's cutbacks should know that "higher prices can lead to substantially lower prices," referring to the familiar argument that climbing crude prices will encourage hedging and spur U.S. shale producers to boost production by what he estimates to be 1.5 million bpd in the second half of 2018 - which in turn will lead to lower prices in 2019.

He also noted that "OPEC is good at holding the line when oil prices are low, but when prices are strong, the discipline can break down both in OPEC and non-OPEC."

Fesharaki said the "sustainable" price range is for Brent crude to be at $50-$55 per barrel: "But can OPEC and Russia resist temptation and keep oil prices in this range?"

If Dennis Gartman, editor of the Gartman Letter is correct, prices will drop sooner than later: earlier this week the "commodities king" worried that the Saudi Arabia anti-graft probe will be "terribly detrimental" to crude oil prices in the long run.