Growing US domestic production is a risk for crude tankers
Interested in FRO? Don't miss the next report.
Receive e-mail alerts for new research on FRO
The United States is by far the largest importer of crude oil, importing roughly 8 million barrels a day, compared to its second largest importer China with 5.43 million at the end of 2012. Thus, any increase in U.S. crude oil production will decrease its reliance on oil imports, which reduces demand for crude tankers that are used mainly to transport crude oil across long distances.
U.S. crude oil production increased by 1 million barrels a day in 2012
U.S. crude oil production continued to grow in 2012, rising from 6.04 million barrels a day during December 2011 to 7.03 million barrels a day in the last month of 2012. Domestic firms have continued their search for oil, riding the U.S. oil boom (since 2008) due to implementation of two technologies called hydraulic fracturing and horizontal drilling that allows firms to extract oil cheaper and from locations that were previously inaccessible. OPEC, the organization of petroleum exporting countries surrounding middle east, even acknowledges growing U.S. production presents a risk to its business.
Demand for crude tankers will be capped as long as the trend continues
Higher domestic production translates to lower demand for crude tankers as the U.S. relies less on foreign crude oil imports. Companies with larger crude tanker ships such as VLCCs (Very Large Crude Carriers) and Suezmax vessels will increasingly rely on other emerging countries for business.
This is negative for firms that focus on large crude tankers such as VLCC and Suezmax size vessels. This includes Frontline Ltd (FRO) that has 31 VLCCs and 17 Suezmax in operation, Knightsbridge Tankers Limited Ltd. (VLCCF) with 4 VLCCs, and Nordic American Tanker Ltd. (NAT) with 20 double-hull Suezmax tankers. Teekay Tankers Ltd. (TNK) will be less affected by this trend as the company owns 11 Aframax, 6 Suezmax and 1 VLCC. Unlike Suezmax and VLCCs, Aframax are sometimes used to carry product oil, which is a refined version of crude oil. As more than 50% of all tanker ships are VLCCs and Suezmax sizes, the Guggenheim Shipping ETF (SEA), an ETF that invests in global shipping companies, will also be negatively affected.