Analysts crunch tanker sums after Opec cut

Morgan Stanley lowers 2017 VLCC forecast while Credit Suisse says move is negative on the surface.

A production cut from Opec has been met with lower 2017 VLCC rate expectations from Morgan Stanley as Wall Street analysts crunch the numbers on how the decision will impact the market.

Last week the cartel agreed to reduce output by 1.2 million barrels per day, setting a new ceiling of 32.5 million barrels per day.

Fotis Giannakoulis of Morgan Stanley today took his red pen to 2017 VLCC forecasts, describing the decision as “an inflection point for the energy sector”.

“The decision is clearly a negative development for near-term tanker demand as it aims to take away a considerable amount of seaborne volume and the prospect of higher oil prices would make fuel cost more expensive at the expense of charter rates,” the analyst wrote in a report today.

Morgan Stanley is now projecting VLCC rates of $24,000 per day in 2017, below the $27,000 per day forecast previously.

This compared with the $47,000 per day being earned at the end of last week in a seasonally strong period for the market.

Short-term pain

Greg Lewis, an analyst at Credit Suisse, says the Opec move sent ripples through the VLCC market, which rates down 3% on the back of the announcement.

He explains that while the cut is negative on the surface, a changing ton-mile picture could limit the impact.

Doug Mavrinac of Jefferies says that the Opec reduction equates to 2% of global production.

“With production cuts now expected to reduce tanker demand and the fleet expected to expand in size by around 6% in 2017, we continue to believe the crude oil tanker market will experience softer charter rates in the coming 12 months compared to the previous 12 months,” he said in a report today.

Noah Parquette of JP Morgan says the read-through from the decision is obviously negative in that anything that cuts crude production will impact crude tanker demand.

"However, the quota cuts were primarily focused in the Middle Eastern countries, with Libya and Nigeria exempt and Venezuela only experiencing a modest reduction," he explained.

"This should result in better ton-mile dynamics, assuming the Far East remains the prominent destination, and should partially mitigate the negative impact."

Long-term gain?

Looking longer term, Morgan Stanley's Giannakoulis believes less oil in the market could lead owners to address a rising fleet quicker than previously expected.

With this in mind, his 2018 VLCC forecast has been raised from $30,000 per day to $32,000 per day. For 2019 Morgan Stanley continues to expect VLCC rates of $42,000 per day.