Last week OPEC+ made the seemingly inevitable decision to roll over production cuts for another 3 months, acknowledging that the current fundamentals do not allow for additional OPEC+ production. In fact, with the fundamentals suggesting a well-supplied market for 2025, the group further slowed the pace of production increases.
As the chart shows, there are several layers to the current OPEC+ production cuts. The most recent round of cuts of 2.2mbd, which were originally implemented in November 2023 will now stay in place until at least April 2025, with production gradually phased back in by September 2026.
An additional cut made in April 2023 of 1.65mbd will be extended until the end of 2026, whilst the 3.7mbd cut put in place in October 2022 was not specifically mentioned and is likely to remain in place indefinitely, or until the current policy changes. The UAE had been given a higher quota for 2025 (+300kbd) which remains, but this will be phased in over 18 months, starting from April next year. Production rises could also be limited by compensation cuts for members who have failed to meet their output targets over the past year, which may further limit the upside in OPEC+ exports. However, this will remain a delicate issue next year, with some countries struggling to keep production under control. For example, field expansions in Kazakhstan will see the country’s capacity increase by 260kbd in the second quarter, whilst any resumption to flows from Kurdistan could also impact Iraq’s efforts to comply. As OPEC+ frequently say, the plan can be adjusted at any time to reflect market conditions.
Whilst expected increases in non-OPEC supply next year suggest there will be little improvement in the outlook for OPEC+ oil production, geopolitical developments could quickly change the picture. With stricter sanctions on OPEC member Iran expected next year, any significant decline in Iranian supplies could open the window for the rest of the group to boost output. Likewise, if a tougher approach towards Russia’s oil exports is taken, then we may see a higher “call on OPEC” to step up output.
So, what does this mean for tankers? Overall, perhaps not a lot. Given the oil supply/demand balances for 2025, further delays to OPEC+ output increases were anticipated. As such, crude tanker demand growth will be driven by expanding production in the Atlantic basin, which typically generates more tonne miles than production from the Middle East. If OPEC+ were to press ahead with production increases, then the US might have to act as the swing producer if prices fell, putting pressure on long haul exports from the US. Further, any increases in Russian production would have likely benefitted the “dark fleet” opposed to the mainstream tanker market. A “market share” strategy, whereby OPEC+ oil floods the market, was always and still is, a key risk, yet for now the producer group continues to show remarkable cohesion.
Data source: Gibson Shipbrokers