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7 points that reflect tanker fundamentals say recovery isn’t looming (Part 5)

World Crude Imports 2013-07-17Enlarge GraphContinued from Part 4

China replaces the United States in oil shipments

There are two key driving forces of oil shipment demand today, which has been a trend for the past five years: a decrease in oil shipments to the United States, replaced by growth in China. In 2010, the largest importers of oil in the world were the United States, China, Japan, and India. The United States imported 9.2 million barrels a day (21% of total), while China, the second largest, imported 4.7 million (11% of total), according to data from the U.S. Energy Information Administration (EIA).

Energy boom in the United States

The United States has historically been the largest importer of oil. But since horizontal drilling and hydraulic fracturing technologies (which made it possible for energy companies to extract oil from areas where oil extraction was initially considered impossible and uneconomical) started to take off after successful trials, the United States has begun its journey to become an energy-independent country. The EIA estimates that the country will become the largest producer of crude oil within the next few years, knocking countries such as Russia and Saudi Arabia off the top chart.

US Crude Oil Production and Import 2013-07-17Enlarge Graph

Higher production, fewer imports

While the U.S. energy boom drew millions of dollars and made a few people rich, it destroyed tanker companies. Originally expecting global oil shipments to grow briskly—like they did before the financial crisis—tanker companies saw a new reality: a decline in oil shipments to the United States. As production grew in the United States, U.S. oil refiners began to rely less on foreign oil. That meant less business for tanker firms that have historically relied heavily on the U.S. economy, which negatively affects shipping rates. U.S. crude oil imports, which stood at 10 million barrels a day, soon fell to just under 8 million barrels a day.

US Crude Oil Rotary Rig Count 2013-07-17Enlarge Graph

Rotatory rigs: a leading indicator of future production

One indicator that’s useful to investors is the number of crude oil rotatory rig counts, published weekly by Baker Hughes. Rotatory rigs use rotating drills to dig into the Earth’s crust to find oil and create wells used to extract oil from the ground. The rig count is a leading indicator of future oil production. In 2007, the number of rotatory rigs for oil used in the United States stood below 300. Today, there are close to 1,400 rigs operating on U.S. soil. The large increase in rotatory rigs, which more than quadrupled, has preceded oil production in the past. However, it’s important to know that the level of active rigs translates to the rate of crude oil production growth, not crude production itself.

So, while energy companies have stopped adding more rotatory rigs in the United States, a consistently high rig count points to further growth in U.S. oil output and fewer imports. This bodes negative for tanker stocks such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), and Frontline Ltd. (FRO), as well as the Guggenheim Shipping ETF (SEA).

Learn more about indicators that reflect tanker fundamentals

Continue to China’s oil import, Part 6, or go back to see the list of indicators, Part 1.

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