refinitiv special report covid-19 & opec - what is … report1.pdfmembers translates to 6.1...

Refinitiv Special Report COVID-19 & OPEC - What is the new normal? Dubai - April 2020

Refinitiv Oil Research - MENA

[email protected]

Ranjith Raja

Oil Research Manager - MENA

[email protected]

Sudharsan Sarathy

Senior Oil Analyst - MENA

[email protected]

mailto:[email protected]



P a g e | 1

D-19 & OPEC -

COVID 19 & OPEC - What is the new normal?

Table of Contents

Table of Contents ................................................................................................................................................ 1

Summary ............................................................................................................................................................. 2

COVID – 19 .......................................................................................................................................................... 3

Status of active cases ...................................................................................................................................... 3

Timeline of Key Events .................................................................................................................................... 3

Economic Indicators ........................................................................................................................................ 4

Impact on Oil Demand ........................................................................................................................................ 5

Refined product casualties .............................................................................................................................. 5

Refinery action and crude stock builds ............................................................................................................ 7

Global Oil Supply ................................................................................................................................................. 9

Oil Price crash................................................................................................................................................ 10

OPEC Exports ................................................................................................................................................. 11

Storage .............................................................................................................................................................. 11

Floating Storage ............................................................................................................................................ 12

Onshore Storage status ................................................................................................................................. 13

Tanker freight................................................................................................................................................ 14

OPEC Agreement – April 2020 ........................................................................................................................... 15

Conclusion......................................................................................................................................................... 16

P a g e | 2

D-19 & OPEC -


Summary

1. Covid-19 has significantly impacted global economic outlook and oil demand

2. Global Covid-19 cases have crossed 1.8 million and the death toll has crossed 113,849

3. US fresh unemployment claims crossed 6 million for the second week in a row and Mar 20 non-farm

payrolls were lower by more than 700,000 m-o-m. Global economic forecasts show recovery could take

time.

4. Light Distillates and Jet/Kerosene most impacted in refined products. Driving demand picks up during the

month of Ramadan and US driving season. Lockdowns could impact the seasonal demand growth.

5. More VGO seen being made available for bunker pool as refineries reduce secondary throughputs.

6. Significant reduction in crude throughputs at key refining centers. Indian refiners have announced

reduction of around 30%. Only exception is China, where refining throughputs are expected to increase

by around 10% in Apr

7. Stock builds observed and market for VLCCs has been supported due to floating storage. Nearly 25%

increase in floating storage volumes expected for April based on fixtures data.

8. The Time Charter Equivalent (TCE) for the major Middle-East to China route was trading at $35,400 per

day on 09th March, before it surged to almost 8 times its daily rate within a week to $273,000 per day on

16th March.

9. The production cut following the marathon OPEC meeting is being planned in three phases:

a. Phase I: A potential cut of 9.7 million bpd from OPEC+ → For the months of May and June 2020

b. Phase II: A potential cut of 7.7 million bpd from OPEC+ → From July till December 2020

c. Phase III: A potential cut of 5.8 million bpd from OPEC+ → From January 2021 till April 2022

(subject to review in December 2021)

10. OPEC+ meeting outcome shows reduction in output may not be in line with market expectations and

forecasts of demand destruction due to the virus. The first phase reduction of 9.70 million bpd for OPEC+

members translates to 6.1 million bpd from OPEC based on October 2018 production levels. But, the net

reduction from OPEC is only about 4 million bpd when compared to Q1 2020 average production from the

group.

P a g e | 3

D-19 & OPEC -


COVID – 19

Status of active cases The outbreak of the novel corona virus, referred to as Covid-19 that was first detected in China at the end of 2019

has impacted global economy and healthcare systems in a serious manner. The epicenter of the virus has since

moved away from China and South East Asia, to other parts of the world with Europe and USA amongst some of

the most impacted regions. The number of confirmed infections of the novel coronavirus exceeded 1.8 million

globally and the death toll crossed 113,849, according to a Reuters tally as of 0200 GMT on 13th April 2020. The

latest developments with respect to the virus are available using the Covid Macro vitals app (link to be pasted on

Eikon search).

Source: Reuters/Refinitiv Eikon

Timeline of Key Events

Source: Reuters/Refinitiv Eikon

As countries grapple with the rapidly growing cases of the virus, many have forced self-isolation, social distancing

and in some cases partial/total lockdowns in a bid to contain the spread and flatten the curve. This has resulted

in reduced economic activity, increased unemployment and has destroyed oil demand with estimates ranging a

decline of anywhere between 20-30% globally.

The live tracking of Covid cases can be layered on the Eikon interactive map (iMap) by choosing the drop-down

list under ‘Trending Topics’ to follow the up-to-date status of reported cases for each country.

http://emea1.apps.cp.thomsonreuters.com/cms/?navid=1592404098



P a g e | 4

D-19 & OPEC -


Economic Indicators The IMF had reduced the global growth numbers for 2020 to 3.3% in January against a forecast in October 2019

that had pegged the growth at 3.4%. The projections were further cut by 0.1% in February. The IMF has since then

announced the onset of a global recession. The April edition of the World Economic Outlook with updated

forecasts is expected to be published on 14th Apr 2020. Around 16.8 million Americans have filed for

unemployment benefits in the last three weeks and weekly new claims for unemployment benefits was above 6

million for the second straight time last week. Non-farm payrolls (RIC: USNFAR=ECI) for the month of March

dropped by more than 0.7 million, the lowest since April 2009. The numbers for April are expected to be higher.

According to the World Bank, the economic growth estimates for India, an Emerging Market (EM) economy could

range between 1.5%-4% for FY 2021 depending on severity of the virus spread & extent of the national lockdown.

Source: US Department of Labor/Refinitiv Eikon

The nonfarm payroll classification excludes farm workers as well as a few other categories of employees. The number is a representation of employment in

goods, services and industrial segments of the economy.

Early signs of resumption in the industrial activity in China have been observed in March with satellite imagery

showing increased concentration of NOx emissions over the country. The same seems corroborated with the

Purchasing Managers Index (RICs: CNPMIN=ECI; CNPMIB=ECI) showing a V shaped recovery in March after a steep

fall in February when the Covid-19 cases were reported to be at its peak. China had seen a plateauing of new cases

in the country and was starting to relax lockdowns including in the original epicenter of Wuhan. However, Reuters

reported on the morning of 13th Apr that China’s northeastern province of Heilongjiang, bordering with Russia is

emerging as a new hotspot of cases raising the country’s new cases tally to a 6-week high. Imported cases causing

a second wave of the virus could seriously damage the economy and have global ramifications on how countries

prevent a re-emergence of the virus as and when they handle the current phase of infections.

Source: National Bureau of Statistics of China/Refinitiv Eikon

25

35

45

55

65

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

%

China PMI

Manufacturing Non Manufacturing

(800)

(300)

200

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

US non farm payrolls

Monthly change (thousands) 6 month moving average

http://emea1.apps.cp.thomsonreuters.com/apps/EconIndicator#/6J/USNFAR=ECI

http://emea1.apps.cp.thomsonreuters.com/apps/EconIndicator#/53/CNPMIN=ECI

http://emea1.apps.cp.thomsonreuters.com/apps/EconIndicator#/53/CNPMIB=ECI

P a g e | 5

D-19 & OPEC -


Impact on Oil Demand

Refined product casualties Jet / Kerosene and Light Distillates:

Severe impact on the aviation sector with reduced passenger loads and countries banning flights to and from the

virus hit areas resulted in Jet/Kerosene cracks taking a severe hit. A warmer than expected winter in North Asia

also prevented any scope for diversion for heating demand. The result has been a crash in the prompt prices of

Jet/Kerosene, increasing the contango steeply and pushing a large quantity into storage. In comparison, Gasoil

has relatively found support from trucking requirement to supply essential goods especially with large cities going

under lockdown.

Source: Refinitiv Oil Research


5

10

15

20

MA

Y-20

JUN

-20

JUL-

20

AU

G-2

0

SEP

-20

OC

T-20

NO

V-2

0

DEC

-20

JAN

-21

FEB

-21

MA

R-2

1

APR

-21

MA

Y-21

JUN

-21

Singapore 10 ppm Gasoil Crack Forward curves ($/bbl)

03-Jan-20 03-Feb-2003-Mar-20 03-Apr-20

-5

0

5

10

15

20

MA

Y-20

JUN

-20

JUL-

20

AU

G-2

0

SEP-

20

OC

T-20

NO

V-2

0

DEC

-20

JAN

-21

FEB

-21

MA

R-2

1

APR

-21

MA

Y-21

JUN

-21

Singapore Jet Crack Forward curves ($/bbl)

03-Jan-20 03-Feb-2003-Mar-20 03-Apr-20

-5.00

0.00

5.00

10.00

15.00

20.00

02/1

2/19

09/1

2/19

16/1

2/19

23/1

2/19

30/1

2/19

06/0

1/20

13/0

1/20

20/0

1/20

27/0

1/20

03/0

2/20

10/0

2/20

17/0

2/20

24/0

2/20

02/0

3/20

09/0

3/20

16/0

3/20

23/0

3/20

30/0

3/20

06/0

4/20

Impact on prompt Singapore cracks ($/bbl)

Jet/Kero 10ppm GO

P a g e | 6

D-19 & OPEC -


Naphtha and Gasoline have also been underperforming as a consequence of the pandemic. Curbs on travel and

increased lockdowns globally have reduced the demand for gasoline while Naphtha has been impacted by weak

petrochemical and gasoline blending demand.


Source: IE Singapore/Refinitiv Eikon

Transport fuel demand typically picks up in Asia and Middle East during the month of Ramadan. However, if

lockdowns remain in place which would have a direct impact on demand, the product cracks could come under

further pressure.

Similar inventory builds have been observed in gasoline within the US and Light distillates in ARA. The summer

driving season in the US is critical for gasoline cracks and the continuing increase in number of reported Covid-19

cases threatens to derail demand.

-10.0

-7.5

-5.0

-2.5

MA

Y-20

JUN

-20

JUL-

20

AU

G-2

0

SEP-

20

OC

T-20

NO

V-2

0

DEC

-20

JAN

-21

FEB

-21

MA

R-2

1

APR

-21

MA

Y-21

JUN

-21

Naphtha cracks CFR Japan Forward curve ($/bbl)

03-Jan-20 03-Feb-2003-Mar-20 03-Apr-20

-8

-6

-4

-2

0

2

4

6

8

MA

Y-20

JUN

-20

JUL-

20

AU

G-2

0

SEP-

20

OC

T-20

NO

V-2

0

DEC

-20

JAN

-21

FEB

-21

MA

R-2

1

APR

-21

MA

Y-21

JUN

-21

Singapore Gasoline 92R Crack Forward curve ($/bbl)

03-Jan-20 03-Feb-2003-Mar-20 03-Apr-20

8

10

12

14

16

18

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Week number

Singapore Light Distillate Stocks (million bbl)

2015-Present Range 2020

5

7

9

11

13

15

17

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Week number

Singapore Middle Distillate Stocks (million bbl)


P a g e | 7

D-19 & OPEC -


Source: PJK; US EIA/Refinitiv Eikon

Refinery action and crude stock builds US refineries have started reducing throughputs of secondary units and crude distillation units (CDUs). As more

secondary units reduce throughput, Vacuum Gasoil (VGO) has increasingly been made available for blending into

low Sulphur bunker pool, consequently pushing down the prices of bunker.

Globally, several refiners have reduced throughputs and have declared force majeure on crude oil purchases or

have offered their bought cargoes into the spot market. Notable amongst them are India’s IOC and MRPL who

have announced nearly 30% reduction in throughputs and have declared force majeure. Reliance Industries Ltd,

in a rare move offered some cargoes on spot market and declared an intent to reduce throughput in April. Several

European and Mediterranean refiners have also announced throughput reduction.

Source: US EIA/Refinitiv Eikon; JODI

400

600

800

1000

1200

1400

1600

1800

2000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Week number

ARA Light Distillate inventories (kT)


200

210

220

230

240

250

260

270

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Week Number

US gasoline inventory (million bbl)


14.00

14.50

15.00

15.50

16.00

16.50

17.00

17.50

18.00

Jan

-19

Feb

-19

Mar

-19

Apr

-19

May

-19

Jun

-19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

US refiners net input of crude oil (million bpd)

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Jan

-19

Feb

-19

Mar

-19

Apr

-19

May

-19

Jun

-19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Apr

-20

Major European refining throughput (million bpd)

France Forecast Italy

Forecast Spain Forecast

P a g e | 8

D-19 & OPEC -


Source: PPAC, METI

The only exception to this has been China with the top Chinese refiners reported to be increasing output by 10%

in April as domestic demand in the country increases. The reduced demand from refineries for immediate

processing has resulted in the excess crude oil being diverted to storage.

18

19

20

21

22

23

Jan

-19

Feb

-19

Mar

-19

Apr

-19

May

-19

Jun

-19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Apr

-20

Indian refining Throughput (million MT)

Actual Forecast

2.50

2.60

2.70

2.80

2.90

3.00

3.10

3.20

3.30

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Japan Throughput (million bpd)

P a g e | 9

D-19 & OPEC -


Global Oil Supply

The three major producers globally (United States / Russia / Saudi Arabia) account for 40% of the global crude oil

production. These three producers together swing the global oil supply which has massive impacts on both the

volume and prices. The large production capacity allows Saudi Arabia to take a de-facto leadership role within the

OPEC group and act as a swing producer to maintain market balance. Russia becoming a part of the OPEC+ has

been a huge boost as any production cut absorbed by the country immensely helps bring the supply in check and

thereby supports the market by providing the much-needed confidence. Thus, the falling out of Russia and Saudi

Arabia accelerated the fall in oil prices which were already reeling under the impact on demand due to Covid-19.

Saudi Arabia’s decision to increase production by 2.5 million bpd between March and April to reach 12.3 million

bpd sent prices crashing.

Source: Refinitiv Oil Research / EIA /JODI

55

60

65

70

75

80

85

0

10

20

30

40

50

60

Jan

-15

Apr

-15

Jul-

15

Oct

-15

Jan

-16

Apr

-16

Jul-

16

Oct

-16

Jan

-17

Apr

-17

Jul-

17

Oct

-17

Jan

-18

Apr

-18

Jul-

18

Oct

-18

Jan

-19

Apr

-19

Jul-

19

Oct

-19

Jan

-20

mill

ion

bp

d

mill

ion

bp

d

Crude Production

USA Russia Saudi Arabia Rest of OPEC Global prod (RHS)

22.0%

24.0%

26.0%

28.0%

30.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-15

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-16

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-17

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-18

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-19

Jan

-20

Mar

-20

Share of Global crude production

USA Russia Saudi Arabia Rest of OPEC (RHS)

P a g e | 10

D-19 & OPEC -


During the pre Covid-19 production cut agreement era, the United States had been the standout winner in

absorbing the market share that were lost by the OPEC+ members. While the global share of OPEC supply dropped

from 40% to 35% during the period of production cut agreement, US share of the global crude supply increased

from 11% to 16%. This has been a pain point for

Russia as the group’s efforts to support prices

resulted in not only the shale industry grabbing their

once held market share, but also sustain production

levels. It is quite evident that the US shale industry is

heavily reliant on the global oil market’s balance and

prices as the recent tumbling of benchmark crude

prices have shown how fragile and leveraged the

industry is and their incapability to survive low prices

for an extended period. The US rig count (RIG-OL-

USA-BHI) fell by 26% in four straight weeks following

the crash in prices taking the US rig count to 504, the

lowest since December 2016.

Source: Refinitiv Oil Research / Baker Hughes

Oil Price crash

The oil markets have suffered the twin shocks of demand destruction due to the pandemic and the supply increase

post the fallout between Russia and Saudi Arabia during the OPEC meeting in March. With Saudi Arabia having

the maximum spare capacity, the Kingdom took full advantage of the situation to open their taps to the maximum,

announcing an aggressive target of reaching 12.3 million bpd output for April. This resulted in the benchmark

crude prices dropping by more 60% to their lowest levels in the past 18 years.

Although this market correction was long

expected, the scale of the correction left

every producer scrambling to find a way for

bringing the group back to the negotiating

table for a global consensus to drop supply.

This also made some of the producers

outside the OPEC+ group such as Canada and

Norway to announce their intention to join

the cut if a global agreement was to be made.

While this might have supported the prices to

recover briefly from historic lows, the market

awaits some much-needed clarity regarding

the new production agreement that is

currently being discussed, which will drive

the movement of prices going forward.


$20

$30

$40

$50

$60

$70

$80

500

600

700

800

900

1,000

Jan-17 Aug-17 Mar-18 Oct-18 May-19 Dec-19

$/b

bl

Un

its

US Active Oil Rigs vs. WTI

Rig Count WTI (RHS)

-8

-7

-6

-5

-4

-3

-2

-1

0

15

25

35

45

55

65

75

12-J

ul

02-A

ug

23-A

ug

13-S

ep

04-O

ct

25-O

ct

15-N

ov

06-D

ec

27-

Dec

17-J

an

07-F

eb

28-F

eb

20-M

ar

10-A

pr

$/b

bl

$/b

bl

Crude Benchmark Prices

NYMEX WTI ICE Brent Brent - WTI

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=gas-stats-template&st=RIC&s=RIG-OL-USA-BHI

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=gas-stats-template&st=RIC&s=RIG-OL-USA-BHI

P a g e | 11

D-19 & OPEC -


OPEC Exports Exports from the supply regions is one of the best indicators to determine the supply overhang in the global oil markets and these are the actual physical volumes that account for end consumption or storage. Refinitiv Oil Research has assessed March seaborne exports of crude oil from OPEC at 21.62 million bpd. Saudi exports for March were assessed at 7.23 million bpd, a significant increase from February levels at 6.85 million bpd. However, for the first week of April, real-time export assessment from the Kingdom stand upwards of 9 million bpd, in line with their announcement to increase output from the country. It remains to be seen if they would eventually be able to sustain their shipment volumes to reach the announced 12.3 million bpd target which would also include their domestic shipments and consumption. Shipments from the Middle East (excluding Iran) increased to 16.38 million bpd, up by 0.11 million bpd m-o-m as the 0.38 million bpd increase in Saudi exports more than made up

for the reduction in exports from Iraq (0.05 million bpd), Kuwait (0.09 million bpd) and UAE (0.12 million bpd).


Storage

The drop-in prices created a huge contango with the WTI M1(WTCLc1)-M2(WTCLc2) spreads reaching in excess

of $5/bbl, while the Brent M1(LCOc1)-M6(LCOc6) spreads reaching $13/bbl. This was a huge opportunity for the

market to make a storage play which further resulted in an increased interest for crude spot fixing to be sold

later. This has resulted in increased interest in the VLCC market to be used as Floating storage, in addition to

onshore storage.

7.0 6.9 6.7 7.0 6.7 6.9 6.3 7.0 7.5 6.6 7.6 6.8 7.2

3.6 3.9 3.8 3.7 3.7 3.6 3.6 3.53.8

3.83.7

3.7 3.7

2.7 2.5 2.4 3.1 2.7 3.0 2.83.2

3.32.9

2.9 3.4 3.31.9 2.2 1.8

1.9 2.1 1.92.0

1.82.0

2.32.2 2.3 2.2

1.8 2.01.8

2.0 2.0 2.22.1

2.12.0

1.92.0 2.0 2.11.2 1.3

1.41.4 1.3 1.3

1.21.3

1.21.4

1.2 1.4 1.4

2.7 2.72.5

2.52.3 2.6

2.32.6

2.22.4 2.0 1.3 1.4

0

4

8

12

16

20

24

Mar

-19

Apr

-19

May

-19

Jun

-19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

mill

ion

bp

d

OPEC Seaborne Crude Oil Exports

Saudi Arabia Iraq UAE Kuwait Nigeria Angola Iran Venezuela Others

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=oil-future-template&st=RIC&s=WTCLc1

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=oil-future-template&st=RIC&s=WTCLc2

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=oil-future-template&st=RIC&s=LCOc1

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=oil-future-template&st=RIC&s=LCOc6

P a g e | 12

D-19 & OPEC -



Floating Storage The flurry of tanker fixtures for storage is evident from the expected increase in floating storage volumes for

April, where it is set to increase by almost 25% based on the fixture data. VLCC’s are booked for a period of

anywhere between 3 – 12 months depending on the position taken by the traders.


-8

-6

-4

-2

0

2

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20

$/b

bl

WTI M1-M2 Spread

-4

-3

-2

-1

0

1

2

3


$/b

bl

Brent M1-M2 Spread

-15

-10

-5

0

5


$/b

bl

WTI M1-M6 Spread ($/bbl)

-15

-10

-5

0

5

10


$/b

bl

Brent M1-M6 Spread ($/bbl)

0

10

20

30

40

50

60

70

80

90

100

Jan

-15

Apr

-15

Jul-

15

Oct

-15

Jan

-16

Apr

-16

Jul-

16

Oct

-16

Jan

-17

Apr

-17

Jul-

17

Oct

-17

Jan

-18

Apr

-18

Jul-

18

Oct

-18

Jan

-19

Apr

-19

Jul-

19

Oct

-19

Jan

-20

Apr

-20

Mill

ion

bb

l

Global Floating Storage - VLCC

VLCC Floating Storage Potential Storage Storage based on T/C

P a g e | 13

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Onshore Storage status Besides the floating storage volumes, another good indication of determining global storage levels are by

monitoring the floating roof top storages at major storage hubs and major demand centers which are the best

proxies for future demand. However, it is still unclear on how much of the remaining free storage is available to

be leased for new production. According to the recent storage levels assessed by ‘Orbital Insight’, based on

Floating rooftop storage measurements, major storage hubs such as in ARA, Singapore, Caribbean are only filled

to around 50-55%, while the major Asian demand centers are filled anywhere between 50-60%.

Estimated Vol in Storage (mill bbl) Fill %

Sto

rage

H

ub

s ARA 62.2 50.1

Singapore 30 55.6

Caribbean 29.1 31.2

Maj

or

Asi

an

De

man

d

Cen

ters

China 928.7 62.4

Japan 350.6 55.6

S. Korea 56.6 51.1

India 128.5 54

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While these assessments are an aggregation of storage tanks located in each of the countries, the level to which

the remaining available storage could be utilized will be the prerogative of the respective countries based on their

domestic demand and long term strategic storage. Even within the storage hubs, most of the available storage

are leased on long term contracts which potentially limits the availability of free space to rent for traders who

would be keen to take advantage of the contango in the market. This pushes them to consider VLCC’s as the best

alternative, thereby pushing up the freight rates on the back of increased demand.

Tanker freight Following the announcement from Saudi Arabia to flood the market with their crude oil when the OPEC meeting

fell through the cracks in March, BAHRI – the shipping arm of Aramco went on a fixing frenzy of VLCC’s which

started the surge in tanker demand and resulted in a sharp uptick to the VLCC tanker freights. Also when Saudi

Arabia slashed their OSP’s for April which was followed by other major producers, the price crash resulted in a

massive rush by traders to take advantage of the steep contango. This further boosted the demand for VLCC’s

both for lifting spot cargoes as well as those fixed on Time Charter contracts for storage. The Time Charter

Equivalent (TCE) for the major Middle-East to China (DFRT-ME-CN) route was trading at $35,400 per day on 09th

March, before it surged to almost 8 times its daily rate within a week to $273,000 per day on 16th March.


The lack of clarity and unwillingness to compromise on a deal between the OPEC+ members helped sustain the

tanker freights at it elevated levels for more than a month, before traders started to look at alternate options such

as splitting the spot volumes and moving them on the less inflated Suezmax tankers.

However, with the OPEC agreement having been agreed for reducing the production levels, the ability to sustain

the inflated freights for VLCC’s would be quite limited as the Charterers would now try to take control of fixing

the vessels by staggering the parcels and limiting any rush to fix their cargoes unless for prompt deliveries, thereby

correcting the rates downward in the coming weeks.

-100000

0

100000

200000

300000

400000

500000

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-18

Dec

-18

Jan

-19

Feb

-19

Mar

-19

Ap

r-19

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-20

USD

/ d

ay

VLCC freight rates for major routes - TCE

MEG - USG MEG - Sing MEG - China MEG - Eur WAF - China WAF - US N.Sea - USG

http://emea1.apps.cp.thomsonreuters.com/cms/?pageId=com-cash-template-n&st=RIC&s=DFRT-ME-CN

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OPEC Agreement – April 2020

The steep crash in prices had forced the global market players to come back to the negotiating table and address

the concerns. An extra-ordinary meeting was called on 06th April, which again due to some internal differences

was re-scheduled to 09th April, followed by the G20 summit on 10th April. Differences between Mexico and rest of

the members, especially Saudi Arabia had threatened to derail the negotiations. A follow up extraordinary

meeting was held on 12th April with all participants finally seeming to have agreed. The group is expected to

reconvene on 10th June to determine further actions as needed. Based on the OPEC announcements post the

meetings, the below agreements are potentially in place.

The production cut is being planned in three phases:

Phase I: A potential cut of 9.7 million bpd from OPEC+ → For the months of May and June 2020

Phase II: A potential cut of 7.7 million bpd from OPEC+ → From July till December 2020

Phase III: A potential cut of 5.8 million bpd from OPEC+ → From January 2021 till April 2022 (subject to review

in December 2021)

The baseline for these production cuts has been agreed to be October 2018 levels, which is also expected to be

the baseline reference for Phase II & III cuts. The below are to be accounted to calculate the estimated production

levels for each of the three phases:

• Baseline for production cuts in Phase II & III to remain as October 2018 levels, except Saudi Arabia, which

will continue at 11 million bpd

• According to Reuters, Iran and Libya continue to be excluded from the agreement for all the three phases,

while the new agreement will also be excluding Venezuela and Ecuador from the cuts

• Considering the sanctions and force majeure, Iran & Libya shall maintain their March 2020 output for the

first phase and Q1 2020 levels shall be considered for Phase II & III

• Ecuador and Venezuela on the other hand are expected to have their maximum output up to October

2018 levels, although their Q1 2020 output has averaged just 0.13 and 0.74 mill bpd respectively

• The split in share of the production cut shall remain the same amongst the other members across all the

three phases, while Saudi Arabia shall maintain the same level of cuts as Russia

Based on the above, the production cut levels for each OPEC member and the estimated output for each of the

phases is as below:

Source: Refinitiv Oil Research / Reuters / Reuters OPEC Survey

Production (mnbpd) Algeria Angola Congo EcuadorEq.

GuineaGabon Iran Iraq Kuwait Libya Nigeria

Saudi

ArabiaUAE Venezuela OPEC

Q1 2020 1.01 1.39 0.33 0.13 0.12 0.21 2.07 4.58 2.68 0.55 1.84 9.78 3.02 0.74 28.43

Mar-20 1.00 1.39 0.31 0.00 0.13 0.21 2.02 4.63 2.67 0.11 1.88 9.80 3.05 0.73 27.93

Oct-18 1.06 1.53 0.31 0.53 0.12 0.19 3.35 4.65 2.73 1.22 1.88 10.65 3.27 1.18 32.67

Estimated Cuts - Phase I 0.24 0.35 0.07 0.00 0.03 0.04 0.00 1.07 0.63 0.00 0.43 2.50 0.75 0.00 6.12

New production - Phase I 0.82 1.18 0.24 0.53 0.09 0.15 2.02 3.58 2.10 0.11 1.45 8.50 2.52 1.18 24.46

Estimated Cuts - Phase II 0.19 0.28 0.06 0.00 0.02 0.03 0.00 0.84 0.49 0.00 0.34 2.00 0.59 0.00 4.83

New production - Phase II 0.87 1.25 0.25 0.53 0.10 0.16 2.07 3.81 2.24 0.55 1.54 9.00 2.68 1.18 26.24

Estimated Cuts - Phase III 0.15 0.21 0.04 0.00 0.02 0.03 0.00 0.65 0.38 0.00 0.26 1.50 0.46 0.00 3.70

New production - Phase III 0.91 1.32 0.27 0.53 0.10 0.16 2.07 4.00 2.35 0.55 1.62 9.50 2.81 1.18 27.36

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Though the agreement seems quite positive in terms of the extent of production cut, the baseline production

numbers of October 2018 makes the depth of the cut insignificant considering the loss in demand due to the

pandemic. While the loss in demand has been estimated to be anywhere between 20 – 30 million bpd, the net

drop in production levels from March 2020 (the last month of the previous agreement) is only 3.5 million bpd or

4 million bpd from Q1 2020 levels, a far cry from the 6.1 million bpd (OPEC share of the cut). With the Phase II of

the agreement minimizing the cuts by 2 million bpd from the group, the net difference further narrows to just 1.7

million bpd from March 2020 levels or 2.2 million bpd from Q1 2020 levels.

Volume (million bpd)

Announced Cut (Oct-18

Baseline)

OPEC share of cut (Oct-18 Baseline)

OPEC Net reduction from Mar-20 levels

OPEC Net reduction from Q1 2020 levels

Phase I 9.7 6.1 3.47 3.97

Phase II 7.7 4.9 1.69 2.20

Phase III 5.8 3.7 0.57 1.07

Although OPEC+ had wanted producers outside the group such as the United States, Brazil, Canada and Norway

to cut a further 5 million bpd, an estimated 3.5 million bpd cut is expected to come more in the way of natural

decline in production due to low prices rather than a voluntary cut. US alone is estimated to have a production

decline of as much as 2 million bpd without planned cuts.

Conclusion With a cure/vaccine for the virus still under development and countries yet to figure out the right balance between

lockdowns and forsaking economic growth, oil demand recovery remains uncertain. Demand for transportation

fuel, especially Gasoline and Jet fuel are likely to remain under pressure even as lockdown gets relaxed as people

would curb non-essential personal and business travel. While the meeting generated frenzied interest and hopes

of a significant production cut, on closer inspection the cuts may not be in line with the market expectations.

While OPEC+ members are expected to contribute 9.7 million bpd in the first phase, the baselines for all OPEC

members (except for Saudi Arabia) have been set on October 2018 production levels, which is 4.25 million bpd

above the Q1 2020 average production of the group. Hence, the cuts in production translates to only a reduction

of about 4 million bpd from OPEC members as compared to Q1 2020 production estimates. These cuts are not

expected to make any significant difference to the current oil market balance and although the headlines would

help and support the bulls for a short term recovery in prices, it is highly likely that this production agreement has

already been factored by the market and as the supply keeps exceeding the loss of demand for the near future,

this is certainly expected to keep a cap on any potential upward trend to the oil prices. Also, the barrels taken into

commercial storage, when released could increase the plateau of recovery.

The markets opened weaker on Monday (13th April) morning trade with Brent trading at $31.38/bbl, down 0.3%

and WTI at $22.93/bbl, up by 0.7%. The lack of enthusiasm in the prices indicate how the OPEC decision has been

taken by the market which for all purposes has already factored the supply surplus till at least Q3 2020, before

demand starts to pick up. Saudi Arabia announced its Official Selling Prices (OSPs) following the OPEC agreement

for crude sales in May, where prices for their flagship Arab Light crude oil has been reduced to Asia, increased to

the US and kept unchanged to Northwest Europe.

refinitiv special report covid-19 & opec - what is … report1.pdfmembers translates to 6.1...

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