OPEC Production Cut Scenario Analysis
Feb. 23, 2024
As we approach the next OPEC meeting on April 3rd, a survey released Friday (Feb 23rd​) by Bloomberg, indicated oil industry participants and analysts are betting OPEC+ will extend production cuts beyond the first quarter of 2024. Of the 17 traders and analysts surveyed, 14 of them expect that OPEC+ will not make any changes to its current production plans in the coming quarter. The rationale for keeping production plans stable is that crude production has been above the demand levels since the beginning of this year and OPEC+ has had to keep oil off the market in order to keep prices stable. According to Kpler, global crude balance is forecasted to surplus on average at 673,000 b/d during the first five months of the year, as crude demand to trend lower due to refinery maintenance, slower oil product demand (economy factor) and some unexpected outages (BP’s Whiting Refinery 440,000 b/d; S-Oil’s Onsan Plants No.3 CDU 250,000 b/d). However, the crude balance is projected to rapidly tighten from mid-2024 should OPEC+ production cut remains in place, resulting in a net deficit of 1.28 million b/d on average in the last seven months of 2024.
In the event OPEC+ reverses course, we have run scenario analysis to calculate the tanker demand impact for each DPP vessel segment. The OPEC+ production cuts are one of the main reasons that VLCCs found notable pressure in 2023, which is likely to be carried in 2024. Based on our calculation, if voluntary cuts (Saudi -1.5 mbbl/day; Russia -300kbd) are unwound, it will add 22 VLCC, 9 Suezmax and 8 Aframax demand equivalents to our base case scenario specific to the Middle East, West African, and Med regions. If the production target is fully revised to the August 2022 levels (baseline used for OPEC meetings), it will introduce an additional 26 VLCC, 5 Suezmax and 10 Aframax demand equivalents. The overall support for VLCC demand could reach a net of 48 ships, or nearly 14% of demand equivalent generated in the Middle East and West Africa markets - this would bode very well for VLCC tanker owners!
Figure 1 – Vessel Demand Equivalent Scenarios
Source: McQuilling Services, Kpler, OPEC
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