Why Oil Tanker Rates Just Doubled

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By Irina Slav

Tanker demand and freight rates are usually a reliable metric of oil demand patterns and trends. They are also among the factors that taken together might suggest what the future holds for the oil industry. Recently, tanker demand and rates have highlighted shifting supply patterns and have sparked a bit of a worry about OPEC’s compliance rates. This, however, is bound to be short-lived.

What sparked the worry was a rebound in tanker rates from a low of US$15,000 per day earlier in February to double that last week. MarketWatch’s William Watts reports that this rebound caused a “knee-jerk” reaction in traders, immediately concluding that OPEC producers were failing in their production cut agreement: higher rates mean more demand for tankers and this means more crude coming into the market, normally.

Indeed, this is the case now as well, only it’s not Middle Eastern oil that’s coming in greater amounts into the market. It’s U.S. light crude, which is being pumped at ever-increasing rates while most OPEC members cut their production to support prices, with the exception of Iraq, Iran, and Venezuela. The latter two are witnessing a decline in their production for other reasons while Iraq is advancing its plans to boost its production and exports. But it’s the only one doing this, it seems.

Bloomberg earlier this month reported that tankers are leaving Middle East ports carrying salt water bound for the United States where they would load U.S. light crude and carry it to various import markets. With OPEC production falling and U.S. production rising, Bloomberg’s Firat Kayakiran noted, tankers were going where they were needed.

Yet it looks like the rise in U.S. light crude for exports will only be one factor supporting tanker demand this year. Teekay Tankers recently forecast that demand for tankers will remain lukewarm during the first half of the year largely because of the OPEC production cuts, but things will change in the second half as prices rise and stabilize at higher levels. What’s more, this year will see the addition of some 2.6 million bpd in new refining capacity, which will also strengthen demand for crude oil carriers and crude oil itself.

Another bullish factor for oil demand and tanker demand is the new set of emission regulations from the International Maritime Organization that are coming into effect next year. These new rules will reduce the maximum allowed amount of sulfur in maritime vessel emissions to 0.5 percent from 3.5 percent, which means a boom in demand for low-sulfur bunkering fuel. Naturally, this would mean a boom in demand for the crude that is used to make it.

According to a poll among analysts carried out earlier this month by Bloomberg, daily tanker rates will average US$29,200. That’s up from a previous forecast from November last year when both crude oil and tanker rates slumped to deep lows amid worries about pressure on demand from the slowing global economic growth.

It seems whatever some traders choose to see in changing tanker demand patterns, the OPEC cuts will continue strengthening prices in the immediate term. Demand will receive a boost from the upcoming IMO rules and especially demand for heavy crude: Middle Eastern producers are cutting production of heavier grades and with Venezuela’s production in a state of collapse, a shortage may be on the way further pushing prices up.

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