A decline in prices along with increasing pressure of oversupply has led OPEC and its allies to cut production. However, crude tanker demand is unlikely to be affected, Drewry believes, as a notional loss in the volume of crude oil trade will be compensated by surge in long-haul exports from US to Asia.
OPEC and Russia-led non-OPEC crude exporters reduced crude production by 1.2 mbpd from October 2018 levels until the first half of 2019. The decision will however be reviewed in April 2019.
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According to Drewry, although there is no specific quota for OPEC members, most of the cartel’s production cut will be made by Middle Eastern members, especially Saudi Arabia. Libya, Venezuela and Iran have been excluded from the cut, while the non-OPEC cut will be driven by Russia, which will tribute 50% of the 400 kbpd reduction.
Before this decision, in June 2018, OPEC decided to increase production to deal with the decline in output from Iran and Venezuela. The cartel rose its output to 32.9 mbpd in October, ahead of the deadline for the US sanctions on Iran.
However, after the US granted a waiver to eight countries allowing them to continue importing Iranian crude until May 2019, Brent prices plunged below the $60 per barrel mark in November. Moreover, as non-OPEC production is expected to increase in 2019, the call on OPEC crude for a balanced market is expected to be 31 mbpd in the first half of 2019, about 1.9 mbpd lower than the cartel’s October 2018 output.
Furthermore, the production cut is not expected to affect the crude tanker market as the oil market will be well supplied. Even a notional loss in the volume of crude oil trade will be more than compensated by an increase in tonne-mile demand because of increased long-haul exports from the US to Asia.
Namely, due to the lack of production cut, oversupply would have led to either stocking in key demand hubs, which would be good for trade) or inventory build-up in production hubs, which would be neutral for trade.
Concluding, Drewry notes that assuming oil demand is not affected by the production cut, most of the lost Middle Eastern supply to Asian markets will be replaced by US crude. In fact, all the gains in non-OPEC production in 2019 will come from the US. This will happen because the distance between the US and Asia is almost double that between the Middle East and Asia, leading tonne-mile demand to balance any notional loss in crude oil trade volumes.