How OPEC Cuts Could Benefit Crude Tankers: Update


By James Catlin


  • Shifting crude trade flows can have a significant impact on the tanker market.
  • Days after OPEC announced production cuts I put out some predictions on how that might impact trade flows.
  • Let’s check in and see how those predictions turned out and take another leap at predicting the future.


In November of 2016, OPEC and other producers pledged to cut output by almost 1.8 million barrels per day. For the most part analysts were expecting this move to have a negative impact on the crude tanker market. In short, the predictions came along the lines of less supply means less crude shipped. Furthermore, reduced supply typically results in higher prices, which could curtail demand. A double whammy of sorts.

But on December 7th I presented an alternate view that crude tanker demand could actually benefit from these cuts. This was followed up with another article on May 19th showing the predictions set forth were actually coming to fruition.

This article should be viewed as an update to those previous articles with special attention paid to the Chinese market.

Companies engaged in the ownership of crude tankers include DHT Holdings, Nordic American Tankers, Euronav, Frontline, Gener8 Maritime, International Seaways Inc, Navios Maritime Midstream Partners LP, Ship Finance International, Teekay Tankers Ltd., Tsakos Energy Navigation Limited and Navios Maritime Acquisition Corporation.


The most important part of the equation regarding the crude tanker trade is found in the relationship between OPEC and the Asian market. Asia consumes a third of the world’s oil supply. Major importers in Japan, China and South Korea have established relationships with OPEC suppliers, with Middle East members providing two-thirds of Asia’s oil needs. The Middle East is the closest major supplier for Asian markets, but some Russia-East Asia routes also represent a short haul such as shipments out of ESPO (Eastern Siberian Pipeline Ocean).

Crude Tanker flows:

China is the world’s second-largest oil consumer and imports two-thirds of its oil requirements making it the largest importer of crude oil.

China’s demand for oil continues to rise as consumption remains strong.

It’s noteworthy that US oil usage is 6.7 times greater than China’s, the European oil usage is 3.1x, and the global oil usage is 1.5x.

While there is talk of increasing utilization of electric vehicles, and some bearish predictions have been made regarding this policy shift, it’s important to note that not all oil that flows into China is utilized for road transportation.

Platts reports that in the first part of the year LPG witnessed strong growth of 24.8% and that demand from industrial users is also expected to grow sharply this year because of tighter environmental regulations. LPG is a cleaner alternative to coal and fuel oil.

Again Platts notes that Jet fuel demand is growing as more Chinese venture abroad and in the first part of the year demand for surged 16.9% year on year.

Several mega refineries are under construction with plans to supply domestic demand as well as overseas markets. In fact, China’s output of refined products increased by 2.4% to 345 million tons. Net exports of refined products rose from 21.35 million tons in 2015 to 32.55 million tons in 2016, achieving a stunning 52.4% increase.

Allied Shipping Research stated in their week 42 report that “China’s insatiable appetite for this energy commodity (crude oil) continues strong and it looks to still have a considerable way to go before we can even consider that its peaked demand level has been reached.”

Yes, I concede that the electric age is coming. I will also acknowledge lessening energy intensity, a slowing manufacturing sector brought on by a government orchestrated shift, and several other factors that can put a dent into crude demand in the long run. But I don’t believe these shifts can have a meaningful impact in the short run so let’s leave those points for a 5 or 10 year outlook.

Moving on, as domestic consumption continues to climb, domestic production has waned.

The result is that imports have grow steadily over the years.

Clarksons reports that from January-August in 2017, Chinese seaborne crude imports have continued to expand firmly, by 12% year-over-year, to 7.9m bpd. This is due to increasing demand as well as dropping domestic production.

As the largest import market, trade flow shifts here can have a profound impact on both crude demand as well as crude tanker demand.

Key Concepts

78% of the aforementioned OPEC cuts, which were reaffirmed in May and are seeing quite a high compliance level, are distributed to the Middle East region. This reduction in supply has forced buyers to find alternate suppliers. As trade flows shift so to do distances traveled by crude tankers. The difference in distances can impact ton mile demand for tankers.

Ton mile demand is just a fancy way of saying how far a ship must travel to deliver a specific cargo. The longer a ship is out to sea for a given cargo, the longer it is removed from the supply side, thus reducing available vessel supply. In short, less supply, given a constant demand, will produce higher prices, which in this case is charter rates.

Aside from the supply reductions the OPEC led cuts have widened the spread between Brent and WTI. This result is that WTI has become more economically attractive even with the longer haul.

Let’s expand further on both.

Crude Tanker flows

Due to the OPEC cuts, tighter supply in the Middle East has encouraged China to diversify its crude sources this year.

Here is a snapshot of China’s largest suppliers of crude oil from an August 27th article out of Bloomberg.

You might have noticed the US highlighted in this chart. There is a great reason for that. The fact is that the USA climbed quite a bit to make that number 11 spot.

The U.S. ranked 32nd in the list of Chinese import sources in 2016, according to data from the Chinese customs authorities. That’s below Mongolia and Sudan, and only just above war-torn Yemen.

But it’s not just China that is absorbing US crude exports.

Europe has also seen quite a boost in US crude hitting its ports.

Additionally, India just received its first shipment of US crude in over four decades which the beginning of an anticipated trend.

The Hindustan Times reports that “this is one of the first shipments to India since the US stopped oil exports in 1975, and follows recent commitments to US oil purchases by IOC and BPCL,” a US embassy statement said. They add that, “crude oil imports have the potential to boost bilateral trade by up to $2 billion.”

These increasing exports out of the USA have an impact across all tanker classes.

Some might remember that in my first article I anticipated that Aframax and Suezmax vessels to be the main beneficiaries of increasing US exports since the only VLCC capable port, the LOOP, was strictly an import based terminal.

But since that time there has been a change that impacts the VLCC segment.

The terminal at Ingleside, Texas, near Corpus Christi, can now partially load a VLCC and then finish filling it up by reverse lightering on the open sea using smaller vessels. Previous VLCC exports have relied solely on reverse lightering, but partial loading at the dock would reduce the number of expensive lightering trips needed.

According to the distance between Corpus Christi, Texas, and the Chinese port of Zhanjiang, via the Cape of Good Hope, is 14,329 nautical miles, a voyage that would take a VLCC 42 days and 16 hours at 14 knots. In contrast, it is 5,020 nautical miles from Saudi Arabia’s Ras Tanura to Zhanjiang, which would take 14 days and 23 hours at that speed. Thus, US Gulf crude exports to China have triple the effect on tanker demand measured in tonne-miles as Chinese imports from the Arabian Gulf.

But that’s not the only ton mile demand shift that we have seen recently. Ms. Alexa Parker, of Clarksons, recently had a great article along with the chart below detailing several shifts.

Another long haul that has gained quite a bit of traction recently is Brazil to China.

Brazil’s biggest port for liquid bulks is São Sebastião, located on the north coast of the State of São Paulo in the Southeast of the country. São Sebastião handles 26% of all of Brazil’s liquid cargos. It has a Petrobras terminal that is very important for handling petroleum and derivatives, in particular for imports.

The distance between São Sebastião and Zhanjiang comes in at 10,133 nautical miles, via the Cape of Good Hope, and takes 30 days and 4 hours at 14 knots which is twice as long as the Ras Tanura to Zhanjiang run.

West Africa has also seen quite a bump in exports to China. We’ll use Nigeria as an example. The Escravos Oil Terminal to Zhanjiang journey is 9,282 nautical miles and takes 27 days and 15 hours at 14 knots around the Cape of Good Hope.

Aside from increasing volumes out of long haul destinations, the graph out of Clarksons points out that there has been a significant drop in volumes for shorter haul routes. Notice that Middle East volumes have dropped as well as Russian and Asian.

Russia/SA Continuing Cuts

On October 28, 2017, Saudi Arabia’s crown prince announced support for extending the production cuts beyond March 2017. Russia looks to be onboard and additionally OPEC signaled the continuation of production cuts for nine more months.

With the two largest producers looking to maintain these cuts, the window is open for number three to take additional market share.

But there is another factor at work here besides supply reductions that could lead to WTI gaining favor abroad.

Brent/WTI spread

In an October 14th, 2016 article I wondered aloud what would it take for U.S. Crude To Gain Favor In Euro And Asian Markets?

The idea behind it was that a significant spread between Brent and WTI could promote US exports of WTI.

Though the formula varies based on cargo size, distance traveled, and charter rates, in that article I concluded that a spread above $1.33 would be the difference needed to create incentive for this shift.

Supply cuts led to a rising Brent price and while WTI price has followed suit the gains haven’t been quite as pronounced leading to an expanding spread.

Bloomberg reports, “Brent for December settlement, which expires Tuesday, rose 46 cents to settle at $60.90 a barrel on the London-based ICE Futures Europe exchange, the highest close since July 2015. The global benchmark crude traded at a premium of $6.75 to WTI.”

In fact, as Bloomberg points out WTI has become more attractive when compared with both Brent and Dubai.

North Sea Brent is used as a pricing reference for West African grades, and the Oman/Dubai average is used for pricing Middle Eastern exports to Asia.

In the beginning of July the spread passed the mark which would inspire substitution and has only grown more pronounced.

The question now is will this continue?

The same supply cuts that inspired this move in the price of Brent are set to continue. Meanwhile, production out of the US has been steadily increasing.

With prices on an upward climb the incentive for US producers to increase output is growing.

This dynamic of sustained cuts vs. increasing US production should continue to favor a wide Brent/WTI spread leading to greater opportunities for US crude to find customers in overseas markets.


There are some very promising signs in crude oil tanker demand that revolve around trade shifts which would increase ton miles traveled.

In my previous article I noted that, “as prices adjust to the Brent and WTI’s respective supply side scenarios, we could see the potential for greater spreads and thus higher rates of substitution.”

Additionally, in another article I stated that “some positive developments have the potential of surfacing, such as increased ton-mile demand through substitutions from Africa or increasing exports out of the USA due to the Brent/WTI spread.”

Now it looks like these predictions are coming to fruition and gaining momentum. I expect that this trend will continue for a variety of reasons. OPEC and other suppliers look to maintain cuts which have reduced short haul volumes to key markets in favor of longer hauls. China will continue to diversify sources. OPEC has reaffirmed their importance in the oil markets and more importantly prices. Spreads look to remain healthy promoting exports out of the USA to Europe and Asia. Finally, U.S. infrastructure is now able to support VLCCs creating a more attractive economies of scale for long haul exports.

As mentioned before, increasing ton mile demand has a positive impact on charter rates. Therefore, as these trends continue, and perhaps even grow more pronounced, the tanker market, owners, and investors stand to benefit.

But there are things that can disrupt this trend. Rising freight rates could decrease the incentive to import WTI. Let’s not forget that rising freight rates are a side effect of increasing ton mile demand. A narrowing spread could also restrict flows of WTI. The spread could be impacted if US output falters or if OPEC doesn’t hold true to its cuts. However, as of right now, neither of these scenarios looks to be much of a risk.

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Source: Seeking Alpha

Image Source: YCharts, Clarksons, Bloomberg


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