The importance of OPEC production
As crude tankers often begin their journey from places in West Africa and the Middle East, OPEC (Organization of the Petroleum Exporting Countries) production has historically been a key driver of vessel demand. When OPEC production is on the rise, investors can expect it to be positive for companies that operate ships that transport crude oil (unrefined oil) across water. Higher shipment out of OPEC would have a positive impact on shipping rates, and therefore earnings and share prices as well.
Higher non-OPEC production expected
One way to assess whether OPEC production will increase or not is by looking at non-OPEC production. This is because OPEC is an oil cartel with the objective to provide steady income to its members and supply to the world. So when non-OPEC production increases, OPEC members are unlikely to increase oil output.
The chart above shows that over the next few quarters, the EIA (Energy Information Agency) expects non-OPEC production to outpace growth in oil consumption, largely driven by the United States and Canada. Because this data is shown as a change from the previous year’s similar period, it portrays the likelihood of lower shipping rates in the next few quarters on a year-over-year basis.
OPEC expected to have higher excess capacity, but isn’t that negative?
After three years of surplus production capacity decline, the EIA estimates OPEC will have higher excess capacity in 2013 and 2014. In 2014, it’s expected to surpass the historical average of ~2.5 million barrels a day. At first glance, this may sound negative, as it could mean lower oil production, and therefore lower demand for crude tankers to ship crude oil from its member countries. But because part of OPEC’s mission is to ensure and secure regular oil supply to the world, much of the increase may be attributable to capacity expansions that OPEC will add over the medium term. This indicator may not be that significant for now.
Negative impact on tanker stocks in the short to medium term
As non-OPEC countries increase their own production, demand for crude tankers will fall. That would have a negative impact on the shipping rates and revenues for tanker stocks such as Frontline Ltd. (FRO), Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), and Ship Finance International Ltd. (SFL). While the Guggenheim Shipping ETF (SEA) will also be negatively affected, the shipping industry as a whole is seeing improving fundamentals as one of the worst periods of excess supply growth is nearing an end.