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Editorial: Light At End of the Pipeline!

Chennai, 14 April 2021:

OPEC+ shocked the market in early March by keeping production cuts in place. Definitely not what the tanker industry wanted to hear. In typical fashion, it was spun as good news for shipping: Spot-rate pressure would be even worse in the near term, but the pain would end quicker as oil inventories drew down faster.

Shipments to India were the second-most important driver of U.S. crude exports in 2020. These volumes were up 26% year-on-year to 287,000 b/d, representing just under a tenth of the total.

This year, India has emerged as the No. 1 destination for U.S. crude exports, according to Kpler data. India imported an average of 421,000 b/d of U.S. crude in Q1 2021, well above volumes to South Korea — 313,000 b/d — and China, which is down to 295,000 b/d.

The Kpler data reveals that India has made a dramatic change in its crude sourcing, at least temporarily replacing Saudi volumes with U.S. cargoes. That change is particularly positive for VLCC demand due to the much longer voyage length from the U.S.

Over the two-year period covering 2019 and 2020, India imported 3.3 times more crude oil from Saudi Arabia than from the U.S. But over February and March 2021, India has imported slightly more crude from America than from Saudi Arabia.

Erik Broekhuizen, manager of marine research at Poten & Partners, highlighted the India factor in a research note last month.

He pointed out that India’s population could surpass China’s as soon as next year, and “even a small change in preferences away from the Middle East towards long-haul suppliers such as the U.S., Brazil or Guyana can have a disproportionate impact on tanker markets because of the ton-mile effect.”

In Q1 2021, Atlantic Basin crude sources represented over 50% of Indian crude imports measured in ton-miles, said Broekhuizen, whereas the Middle East represented just 16%.

OPEC+ surprised the market yet again in early April — this time by finally agreeing to increase production. This is what tanker owners had been hoping and expecting to hear four weeks earlier.

According to Clarkson Platou Securities analysts Frode Mørkedal, the OPEC+ agreement “positions tankers for an earlier recovery than expected” and is “a significant positive for the tanker sector.”

Jefferies analyst Randy Giveans believes that “with oil inventories now in line with the five-year average and demand on the rise … crude tanker rates will improve.” Deutsche Bank analyst Amit Mehrotra predicted “larger and more frequent [production] increases to come.”

OPEC+ production strategy is just one piece of a very complicated puzzle. Another piece is non-OPEC exports. Particularly long-haul U.S. crude exports to India, as revealed by new data from Kpler provided to American Shipper.

Between OPEC+ and Saudi Arabia individually, production will increase by 600,000 barrels per day (b/d) in May, 700,000 b/d in June and 841,000 b/d in July.

The combined 2.14 million b/d increase will come in the wake of 8 million b/d in cuts. Of that, around 7 million b/d has been cut by OPEC+ since last year and 1 million b/d by Saudi Arabia since the beginning of this year.

The big question is: How much of the May-July increase will actually flow into tankers? The bump-up in production coincides with a time of year when the Middle East consumes more domestically for air conditioning.

Shipments of U.S. crude to Asia are particularly important to VLCCs due to voyage length. It is more than twice as far to China or South Korea from the U.S. Gulf as it is from the Middle East. It is more than eight times as far from the U.S. Gulf to India as it is from the Middle East.

The first quarter of 2021 has been historically bad for the tanker sector. During the past month, some day rates for VLCCs have been assessed in negative numbers, implying that some ship owners may have paid more for a voyage’s fuel than they received to transport the cargo. VLCC owners are still bleeding money. Current rates are about half of all-in cash breakeven, which includes financing costs as well as operating expenses.

According to Alphatanker, “Although there may be some upside to tanker rates over the coming months … the anticipated sustainable, strong recovery in hire rates in Q4 2021 may be clipped or delayed, as there will remain a significant oil inventory overhang to be cleared. This overhang would have been significantly smaller had [OPEC+] decided not to hike production.

“Furthermore, the specter of increasing tanker demand in Q2 2021 may see less tankers scrapped than would otherwise have been the case.”

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