The Big Picture: Oil Demand And Geopolitics Drive Tanker Demand

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Oil demand and geopolitics drive tanker demand, but this year more than most it is oil supply that will provoke the biggest shifts in tanker trade patterns. From new oil refineries in the Middle East, West Africa, and Mexico, to oil pipelines in Canada and voluntary OPEC+ production cuts, we tackle some of the main disrupters and assess how the tanker world will adjust.

Extended Output Cuts

OPEC+ meets virtually this week to discuss whether or not certain members should extend 2.2m b/d of voluntary output cuts amid quota cheating by other members. These supply cuts were agreed last November – initially for just three months but subsequently extended. Just a few months ago – when oil prices were higher and geopolitics more tense – it was thought likely that cuts would gradually unwind from June onwards. Now that oil prices seem to have settled around a comfortable $80/bbl (down from $93/bbl mid-April) the cuts are more likely to be extended, at least for the next three months, we believe. 

Of course, these are voluntary cuts, so there is no need for any announcement on the matter at or after the OPEC meeting. A key problem facing OPEC+ is the huge uncertainty over oil demand growth this year. The IEA has recently lowered its outlook for world oil demand growth to 1.06m b/d – fingering lower European demand in particular, while OPEC maintains its 2.25m b/d growth expectation.

Russian Oil Import 

The G7’s Russian oil export price cap appears increasingly ineffective. Shadow tankers are now moving most of Russia’s oil, sold at levels comfortably above the price cap. India says this week that it will continue to buy Russian oil despite the higher prices and tightening of Western sanctions on price cap breachers. India continues to take around two-thirds of Russian Urals exports, hitting record levels in April of 1.5m b/d. For a short while at the end of last year/start of this year, it looked like India would take less Russian oil as the US tightened its sanctions on ships moving Russian oil, but such concerns appear to have been short-lived. Almost all Russian Urals moved to India and China routes via the Suez Canal.

Red Sea Diversion 

In April, Houthi attacks in and around the Red Sea caused a 73% drop year on year in crude and refined product flows through the Suez Canal. Longer voyages for all ship types, particularly fast-steaming containerships, have boosted HSFO prices both in absolute terms and relative to VLSFO prices, which have softened. Singapore’s bunker sales are 30% up year on year since the start of the year. Higher buying of HSFO relative to VLSFO has reduced the scrubber spread to its lowest in nine months in Singapore, and lowest in 5 months in Rotterdam. Today the scrubber spread sits at around $78/bbl.

Tankers prepare for Dangote ramp-up

Nigeria’s 650kb/d Dangote refinery has just signed offtake/supply deal with Total as it prepares to double production by the end of the year. The Lekki refinery started its crude unit in January. Naphtha exports followed in March and middle distillate production in April. Straight-run fuel oil production is expected to start in June and gasoline production should begin within the next few months.

Aliko Dangote recently claimed that his refinery will produce enough gasoline to satisfy demand for West Africa, enough diesel for both West and Central Africa, and enough jet to supply the entire African continent and export surpluses to Brazil and Mexico. Last week we noted that Dangote has agreed to a 2m bbl/month supply deal for US crude.

How will Europe adjust?

The imminent loss of the West African market for Europe’s surplus gasoline is likely to force European refiners to look for outlets elsewhere, or cut runs. Today almost one-third of European gasoline exported beyond European shores ends up in West Africa. So far this year, West Africa has imported about 320k b/d of gasoline from European refineries.

The East Coast of N America currently imports another 430k b/d of gasoline (average so far this year) from Europe. But the US East Coast is unlikely to lift imports of European gasoline in coming months. Instead, US Gulf refiners will be hoping that US Atlantic Coast demand will offset some of the decline it is experiencing from its all-important Mexican demand base. Mexico’s government needs to demonstrate a strong shift to energy self-sufficiency before elections next month, so further erosion of US gasoline imports is likely.

TMX starts to shake 

US West Coast crude sourcing also faces disruption this month with the startup of 590k b/d TMX pipeline expansion, which loaded its first cargo in Vancouver this week. The volume, and destination of these new Canadian flows are still uncertain, as indeed is the size vessel it will benefit. Once running at full tilt, the 590k b/d capacity of the new pipeline requires roughly one Aframax lifting per day on top of existing volumes. Unusually efficient scheduling will be required to avoid logistical disruption.

Much of the new Canadian crude flows are expected to head to US West Coast refineries, displacing crude from the East coast of North and South America (arriving mostly from Alaska on Suezmaxes and Ecuador/Panama on Aframaxes and some Suezmaxes), but principally from the Middle East (mostly Iraq and Saudi Arabia) on VLCCs. Some analysts see this as net bearish for VLCCs. However, displaced Alaskan and South American crude would most likely head to Asia on VLCCs or Suezmaxes, and Canadian crude via TMX will also be tempted towards north Asia and (as evidenced by Shell’s recent VLCC fixture) as far away as India.

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Source: Breakwaveadvisors