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OPEC Price Wars: Who Benefits?

Feb. 4, 2022

In trying to determine what can cause a strong tanker market rebound, we looked at past events and under what conditions they occurred, excluding any events that affected only the supply side (e.g., the COSCO sanctions).

The first one was the 2014 price war initiated by Saudi Arabia and Russia against the fast-growing US shale oil producers.  At the time, OPEC producers exceeded their production ceiling almost every month and the US kept adding to its output leading to a market glut, that was exacerbated by a slowdown of China’s economy.  As a result of OPEC and Russia’s non-action, oil prices started to plummet in May of 2014, and the resulting contango structure in the market became a boon for tanker demand, with ships utilized to fill inventories, both floating and land based.  The VLCC sector saw average earnings exceeding US $65,000/day for the entire of 2015 (Figure 1).

What we experienced in mid-2020 was a story with many similarities to 2014.  Once again, we had an OPEC price war between Russia and Saudi Arabia that, despite appearances, hurt US shale producers in the same way it did back in 2014.  This was coupled with a global pandemic that brought demand to a halt and oil prices plummeted with the market going, again, into steep contango.  Like 2014, VLCC earnings surpassed US $150,000/day for March-April 2020, mainly on floating storage demand (Figure 1). 

However, we caution that in both cases, after oil stockpiles were full, the inevitable draws occurring with the oil price recovery take away transportation demand, leading to a low-earnings cycle as it happened this past year.

The conclusion we draw from these observations is that a contango market is essential for a rapid increase in earnings for DPP tankers – especially in the current tonnage supply environment.  Without a change in OPEC policy, the DPP markets could remain weak for the next two years if no rapid decreases in supply take place (i.e., deletions).  Another price war may look unlikely at the moment, but what the US does in terms of policy/supply going forward could be a determining factor.

Global themes and how they affect the tanker markets are covered in depth in our recently published 2022 – 2026 Tanker Market Outlook.

Figure 1 – VLCC TCE & Brent Price Jan 2014 – Dec 2015 (Left) & VLCC TCE & Brent 1st – 12th Month Price Differential Jan 2020 – Dec 2020 (Right)

Source:  McQuilling Services, JBC Energy