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Saudi oil output cut to impact tanker demand

While the initial reaction to the surprising move by Saudi Arabia to cut oil production is negative for the tanker market, Russia’s output increase is seen as a silver lining

Saudi Arabia announced after the Opec meeting on Tuesday that it would cut oil output by 1m barrels per day in February and March, allowing non-Opec members Russia and Kazakhstan to increase production by a collective 150,000 bpd

SAUDI Arabia’s decision to cut output by 1m barrels per day is a negative for tankers already suffering from weak rates. 

The world’s biggest crude oil producer made the surprise announcement following this week’s two-day meeting of the Organisation of the Petroleum Exporting Countries. Oil prices rose to around the $53 per barrel mark, an 11-month high, in response. 

The 1m bpd voluntary cut for February and March takes the kingdom’s production to 8.1m bpd.

Non-Opec members Russia and Kazakhstan will be able to increase output by a combined 150,000 bpd over the two months.

Arctic Securities expects that overall, oil output will be 500,000 bpd lower in the first quarter of 2021 than in the final three months of 2020, bar any significant increases from Libya or Iran.  

“Lower Saudi exports is a negative for tankers, but the key now is whether demand will continue to rise in important dependent Asia,” the Oslo-based firm said in a note. “If yes, Atlantic crude producers will have a feast and tonne-mile gains should offset most of the volume losses.”

Opec said it had undertaken the “largest and longest crude oil production adjustments in history, in response to the exceptional challenges and market conditions caused by the pandemic”.

Rising infection rates resulting in renewed lockdown measures in some countries could lead to a more fragile economic recovery again in 2021. 

While market sentiment has been buoyed by news of vaccines, the group urged caution, due to “prevailing weak demand and poor refining margins, the high stock overhang, and other underlying uncertainties”.

Last year, seaborne crude exports fell 5% to 40.9m bpd from a year earlier, according to Lloyd’s List Intelligence data. That translates to the removal of some 2m bpd from the market.  

Jefferies expects tanker rates to “remain relatively weak” during the first half of the year, with an improving rate environment anticipated during the latter half of 2021, as demand and production increase, following a perceived easing of the pandemic.

Shipping association BIMCO said while the Saudi decision had an underlying negative tone, especially for very large crude carriers, the Russian increase is a silver lining, which could help the aframax and suezmax segments.

Last year saw a 100% rise in Black Sea to China trades to 52 journeys, 31 of which were conducted on suezmaxes, its chief shipping analyst Peter Sand said. Similarly, Baltic Sea to China voyages also doubled on the year to 30, 19 of which were made on aframaxes.

China is the only growing importer of crude oil, he said, adding that the replacement of Saudi barrels with Russian volumes would not make a huge difference to loss-making freight rates as they effectively balanced each other out.

Poten & Partners showed weaker rates for the Middle East to Far East route. with the time-charter equivalent for a vessel using very low-sulphur fuel at $10,100 per day and one using high-sulphur fuel oil at $16,200 per day.

The average weighted time charter for a VLCC on the Baltic Exchange dropped 20% to $3,977 per day at the close on January 6. In contrast, rates hit a record $264,064 per day in March 2020 when vessels were increasingly being used for floating storage plays.

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