Tankers: Is the glut in oil production bound to end?

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Over the course of the past few weeks, the main debate in the oil market, is the potential agreement over the halting of oil production levels at today’s levels, as a measure to erase the current oil glut and restore balance in the market, thus helping prices to move upwards. Should this scenario work, some analysts believe that it will bring pressure at tanker rates.

In a recent report, shipbroker Cotzias Intermodal Shipping Inc. noted that “oil producers have turned to the concept of limiting their output to January levels as a certain form of action to boost prices that have fallen more than 70% since the middle of 2014. Oil supply outpaces demand on any given day, and billions of barrels of oil are being stored rather than consumed. As a result, oil prices have collapsed to as low as $26 per barrel in February, from well over $100 in 2014”.

According to Mr. Christopher Thomas Whitty, Marketing Manager-Towage & Port Agency, “it is interesting that currently Iran and Iraq both play an important role in the contemplated production freeze. Iran has already been increasing production and the country’s position is that it would consider oil-production caps only after the country’s output rises back to the levels before the West imposed sanctions over its nuclear program. Basically Iran wants to increase production now, in an attempt to revive their share in the global markets, before they even consider discussing about participating in an output freeze. Iraq also has a longstanding policy of seeking to raise production regardless of the price-stabilizing policies of the OPEC”.

Cotzias Intermodal Shipping added that “Russia said that OPEC’s meeting with other key oil producers regarding an output freeze will probably be held in Doha, Qatar in April. They said that Iran supports the plan, while Tehran says it wants to double its crude exports to 4 million bpd first. However, in reality according to the latest oil market data, both Russia and Saudi Arabia ramped up their oil production in February, despite talks about supply caps. Russian oil supply reached a new high of 11.08 million barrels a day in February, and Saudi Arabia during the same month increased its daily output by 14,000 barrels, to 10.14 million barrels per day, according to OPEC’s analysis of market sources”.

Whitty noted that “generally speaking, countries are less willing to freeze and especially to cut production, because doing so means giving up market share for their oil, which might be hard to win back especially during this transition period. The four major oil powers, Saudi Arabia, Russia, Venezuela and Qatar, are heavily involved in the various discussions and the coordinated efforts will probably include soon also non OPEC countries such as Oman, Kazakhstan and Azerbaijan. Assuming all are on board, the oil glut could begin to ease, particularly with American output on the decline. Or at least that is what they anticipate with this concept. The fact is that a two million barrel-per-day surplus in oil supplies will continue to weigh on prices in the short term and even if these countries freeze output, they would still need more drastic efforts to support prices in the long term”, he said.

Whitty concluded his argument by noting that “from my own perspective, it looks like their ultimate goal is to reach a certain consensus and, if they actually get there, I would expect them to quickly focus on actually reducing production in the long term. In any case, analysts estimate that maintaining production at current levels will probably not have a significant effect on prices”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide