The impact on demand from the Covid-19 pandemic, coupled with the excess of crude oil that flooded the market in Q1 2020 will, despite production cuts, continue to impact into Q2 2020 and beyond
Covid-19 coronavirus continues to paralyse the world. Its consequences also affect both the oil market and the tanker transport market. We focus on ensuring a good working environment and protecting the health of our employees and crews while also fulfilling our commitments to our customers. Looking at tanker market developments in Q1, we can see that the upturn at the end of 2019 continued in January 2020. These developments were a direct consequence of structural factors in the form of relatively good growth in the global economy, good demand for oil, balanced stock levels and few ship deliveries – in other words, the factors that previously formed the basis for our belief in a strong market in 2020 and 2021.
While the tanker market declined in February, it was strong again in March, mainly due to a low oil price and a lack of agreement within OPEC+ regarding further production cuts. This resulted in Saudi Arabia, the world’s second largest oil producer, abandoning its production cuts and instead opting to increase its market share through sharply reduced prices to its customers. The price, already at a low level, fell by another 30% overnight. This resulted in significantly increased oil trading – and sharply rising rates in the tanker market. In a short space of time, rates in the VLCC segment rose from around US$25,000/day to US$150,000 – US$200,000/day. In the Suezmax segment, rates rose to US$70,000 – US$100,000/day, depending to some extent on geographical area. Rates also went up in the product segment; MR rose to US$20,000 – US$25,000/day. And that is where they have remained, with occasional fluctuations both upwards and downwards.
However, it is important to point out that a large proportion of the oil that is now transported will be placed in storage close to the consuming countries – both onshore and on vessels. Actual consumption of petrol, diesel and aviation fuel is significantly down as a result of the virus. The reduction is estimated at about 20–25M b/d for March/April/May. Accumulated stocks are now driving the market, but as these stocks gradually start to empty there will be reduced demand for tanker transport. This is the current state of the dynamics.
In early April, OPEC+ (supported by the G20) decided to cut production by 9.7M b/d in May and June (based on October 2018 production), corresponding to about 10% of production. In addition to OPEC+, other G20 countries will also contribute with ‘natural’ production cuts, which means that total production cuts are actually larger. The fact that the world’s major oil producers are now adapting production to the current situation is understandable and basically sound. Whether the reduction will be sufficient to strengthen the oil price depends on how long the effects of the pandemic last.
We should also note that the production cuts here and now do not outweigh the reduced oil consumption. Stock accumulation is therefore likely to continue, probably during most of Q2. We will then hopefully see a slow return to more normal transport flows starting in Q3 – with higher consumption (and drawing of stocks) as a result.
In the short term, it is our assessment that accumulated stocks will contribute to a continuation of the strong market. Production cuts are then likely to bring reduced demand for transport. In this situation, the fact that a relatively large proportion of the storage is on vessels may dampen the negative impact to some extent. This is all said with the greatest respect for the difficulty in making substantiated predictions in the current situation.