An Update on VLCC Floating Storage
April 1, 2021
It would not be an exaggeration to say that tanker market participants were on edge today as the OPEC+ decision was revealed to the market. The agreement from today’s meeting could be considered a surprise, this time benefiting tanker owners as production levels are set to rise beginning in May and trend higher through July, at least. As part of the accord, Saudi Arabia will return 100% of its 1.0 million b/d voluntary cuts between May and July, skewed more heavily towards the latter months. In addition, OPEC+ members (including Saudi Arabia) will add 350,000 b/d in each May and June, with another 441,000 b/d coming online in July.
With this backdrop in mind, we take a look at the latest statistics for floating storage and attempt to discover if there will be any differentiation from our previous estimates. Our original call, going back to the January Tanker Market Outlook report (and even before that) projected floating storage requirements to have traced back to pre-COVID levels (~25-30) by the end of Q1 2021 (Figure 1). We updated this forecast in our most recent short-term outlook reports to occur by the end of April 2021. As of last count, we show between 30-35 VLCCs engaged in floating storage; rapidly approaching our projected levels. Today’s news does not impact our call on floating storage as April’s crude supply outlook remains intact; and thus re-affirm our call for a further release of 5-10 VLCCs back into the trading market over the next 30 days, which remarkably will add further supply-side pressure to the crude tanker balance over the short term. However, the projected increase of crude supply beginning in May should begin to show up as increasing fixture activity by the second half of April.
A full analysis of the impact will be revealed in our monthly short-term outlook report next week, but at a quick and dirty glance, the top-level numbers announced by OPEC will translate into far less exports. One of the main reasons is that crude demand in the Middle East rises significantly over the summer, from refinery demand, but also direct use. The projected increase for the May-July period (average levels) versus April is for a 500,000 b/d increase in Saudi demand, which effectively wipes out the voluntary cut returns in those months. Therefore, in May and June, we focus on the 525,000 b/d average from the rest of the group over those two months. We estimate approximately 50% of this will be from Middle East producers (260,000 b/d), while about 80% goes on VLCCs. The math leads us to a conclusion that approximately 3-4 VLCC liftings per month (May and June) are likely basis the outcome of this meeting. With 25 VLCCs carrying over from last month in the AG position list, and more ships unwinding from floating storage it is unlikely that any meaningful support in the freight structure is found in Q2.
Figure 1 – VLCC Floating Storage Statistics
Source: McQuilling Services
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