Opec reached a deal that will see its member, and some non-member, countries effectively cut some 1.2 million barrels per day of oil production in an effort to boost prices.
The cuts potentially represent a mixed bag for tanker markets as some cargo volumes decline next year, but non-Opec exporters could fill the void and pump more oil.
The 14-member cartel said it plans to target production starting next year of 32.5 million barrels per day. That level is coming off its most recent all-time high of some 33.8 million barrels in October, according to the International Energy Agency (IEA). November Opec output is thought to be hovering at 33.6 million barrels.
Two countries are expected to bear brunt of the cuts. Saudi Arabia said it will cap production its production at just over 10 million barrels per day, a drop of some 500,000 barrels per day from its October peak, while Iraq will cut its output some 200,000 barrels per day from the October peak of 4.6 million barrels per day.
Some non-Opec states have also agreed to take part in the cuts. Russia's energy minister Alexander Novak said the country could slice 300,000 barrels per day of production from its 11.2 million barrels per day of production. Mexico reportedly plans to cut 150,000 barrels per day while Oman may make nominal cuts too.
Other producers which have been struggling to boost production, are expected to be exempt from the cuts. That includes Iran, Nigeria and Libya.
The announced cuts had the expected impact with front-month crude oil prices rising 9% for the day on the news.
Opec meeting not 'vital' to shipping
With cuts impacting cargoes out of the Arabian Gulf, very large crude carriers (VLCC) stand to lose the most in terms of demand. The Baltic Exchange’s forward freight agreement (FFA) on rates for the benchmark Arabian Gulf-to-Japan VLCC transit dropped to around $22,368 per day for 2017, a fall of some $3,300 per day from yesterday’s assessment.
MacLeod held out the prospect that rising prices would incentivise non-Opec producers to up their production, thereby counteracting any potential decrease out of Opec members.
“We do not believe that the outcome of the meeting will be vital for shipping as we regarded volumes of oil transported as robust,” MacLeod told analysts.
Despite the rise in prices, Opec stuck to its original forecast for this year and next that global oil demand will rise by 1.2 million barrels per day.
Knock-on effect to bunkers, floating storage
The production cuts are "bad in the short term," Smith said. "However, a price rise will encourage more production in other regions."
If there's any consolation to the news today, it's that producers in the Atlantic Basin will be largely exempt from the cuts. Smaller tankers that serve those markets may yet see good utilisation in the coming months, Smith says.
As for Russia, the effect on trade flows will depend if the country cuts volumes coming out of the Baltic Sea region or from the country's far eastern Siberia pipeline.
Beyond trade flows, the Opec news is being felt in other areas of the tanker market, Smith says.
The immediate spike in front-month prices has impacted economics for floating storage.
The current price curve shows a spike in crude prices three to six months out from now, indicating that's when trader believe the cuts will begin to be felt. But deals shorter or longer than that period make less sense.
"Market seems to think the supply glut is still there, but will tighten up around the three-to-six month mark," Smith said.
Bunker prices, too, are likely to get a lift, and raising fuel costs for owners and charterers. Bunker fuel was trading at lows of around 55% of the price of crude oil in the depths of the supply glut, but that ratio has tightened up to almost 70% and could go higher if crude remains strong.
China buying may slow
One analyst who spoke on background said the wildcard in higher oil prices may be China. The country spent much of last year and the early part of this year aggressively filling its strategic petroleum reserve due low prices.
Indeed, when oil prices first began rising in late summer as Opec signalled its willingness to entertain cuts, China began to dramatically slow down its imports. October imports fell to 6.8 million barrels per day in October, a fall of 1.3 million barrels per day from September, the IEA said.
Yet China may also seek diversify away its supply from the Arabian Gulf if volumes come down, the analyst added. That could ultimately benefit tonne-mile demand if tankers have to come from other exporting regions such as South America, the North Sea or North America.
Potential positive for energy shipping equities
VLCC-focused equities were mostly down for the day, with Euronav and DHT reaching close to their 52-week lows of $7.10 per share and $3.55 per share, respectively. Frontline lost close to 4% to reach just over $7 per share.
Firmer crude prices could have a broader benefit to the broader energy shipping industry, Webber says. Since other energy prices are linked to crude oil, there is the potential for better pricing and trading opportunities in LNG and LPG markets.
