KUALA LUMPUR: The extension of the Organisation of the Petroleum Exporting Countries plus (Opec+) output cuts into April may lend strength to oil prices, but will intensify the pain felt by the tanker shipping sector.
Nonetheless, analysts believed this would also set the stage for a strong production rebound and a sharp recovery in tanker rates in the second half of this year, which would benefit the likes of MISC Bhd.
“The good news is that oil inventories will continue to be drained at a fast pace in April, and while this intensifies the pain for the tanker sector in the interim, it also means that future Opec+ production increases may be sharp, ” said CGS-CIMB Research in a note yesterday.
Consequently, the research house expected earnings recovery for MISC.
“AET, MISC’s tanker arm, reported pre-tax losses of US$5mil (RM20.6mil) in Q3FY20 and US$24mil in Q4FY20. Losses will likely continue into H1FY21.
“We pencilled in AET’s pre-tax profits at US$42mil for FY21, versus US$82mil for FY20, premised on a sharp tanker rate recovery in H2FY21, but may relook at the forecasts if weak rates extend into Q3FY21.
“During Q4FY20, AET had spot exposure on 35% of its crude tankers overall (VLCC 6%, suezmax 32%, aframax 49%), small enough to ensure relatively modest AET losses for H1FY21, which may be mitigated by the delivery of six very large ethane carriers on highly-profitable charters by Q1FY21 as part of MISC’s liquefied natural gas division, ” it said.CGS-CIMB maintained its “add” rating on MISC with a target price of RM7.82.
Last week, Opec+ had decided to keep production levels largely unchanged for April versus March, contrary to market expectations of an increase in production of between 0.5 million barrels per day (mbpd) and 1.5 mbpd.
CGS-CIMB said the total Opec+ output cuts of 7.9 mbpd planned for April 2021 remained high relative to the May-July 2020 cuts of 9.7 mbpd, August-December 2020’s 7.7 mbpd, Jan uary 2021’s 7.2 mbpd, February’s 8.125 mbpd and March’s 8.05 mbpd.
The extension of the Opec+ production cuts into April will be negative for crude tanker rates for a number of reasons.
“First, with Opec+ producing less crude than global demand, it was satisfied by drawing down onshore and offshore inventories in Q3’20, Q4’20 and Q1’21, cutting demand for sea transportation services. Oil stocks will likely also draw down in April, in our view.
“Second, the release of ships from offshore floating storage will increase the supply of ships competing for limited cargo voyages.
“Last, higher oil prices as a result of Opec+’s decision has raised the price of very low sulphur fuel oil that is used as ship bunker fuel by 31% from US$395 per tonne as at Dec 25 to US$518 as at March 5.
“This has eaten into time charter equivalent (TCE) earnings since freight rates have not improved. Our thesis for a tanker market recovery sometime during H1’21 will now be delayed to May at the earliest, assuming Opec+ chooses to taper its production cuts at its next meeting on April 1, and tanker TCE rates will likely remain low for the next two months, ” CGS-CIMB explained.