Tanker stocks weekly analysis August 5–9

Part 8

Oil production outlook mostly negative for tanker stocks

OPEC oil production

In Part 7, we saw that the possible gain in oil imports in China will likely be offset by a decline of similar weight from the United States throughout the end of this year. But the long-term crude oil trade doesn’t look encouraging either. To see why, let’s take some of the projections made by the U.S. EIA (Energy Information Agency) regarding OPEC’s oil production.1 Because the OPEC (Organization for Petroleum Exporting Countries) has historically supplied the majority of incremental oil demand, it’s considered a key indicator of tanker business. When OPEC production increases, more ships will haul oil to countries around the world. But when the collective countries’ output falls, so does demand for ships.

Non-OPEC Crude Oil and Liquid Fuels Production Growth 2013-08-13Enlarge Graph

The United States: The largest production increase

Based on the EIA’s short-term energy outlook published in August 2013, the majority of future oil and liquid fuels production will arise from the United States, followed by Canada. In 2013, U.S. oil production and liquid fuels production will grow by 0.9 million barrels per day, which is higher than what we initially estimated in Part 7 of about 0.6 million barrels per day. Perhaps most of the production increase will come during the last quarter of this year. With China’s oil import only growing at 0.44 million barrels per day every year, China will have to become really hungry in order to soak up the falling U.S. appetite.

World Consumption and Non-OPEC Production 2013-08-13Enlarge Graph

Non-OPEC production outpaces consumption

The possibility of other countries soaking up excess capacity due to falling U.S. imports is also close to zero. Until 2014, analysts expect non-OPEC oil production to exceed world consumption. That also means oil prices are unlikely to rise too much from the current price level. If there aren’t any supply disruptions, oil prices could be lower than now, which could hurt oil producers’ earnings.

OPEC Surplus Crude Oil Production Capacity 2013-08-12Enlarge Graph

OPEC production fall

To keep earnings steady, though, OPEC will likely cut production to keep the price of oil steady. In its latest public announcement of its decision to keep output stable in May, OPEC saw ~$100 as a good price level for oil and profitability. With the increase in production we expect to see from non-OPEC countries, OPEC’s surplus crude oil production capacity is projected to increase to 3 million barrels per day in 2013 and 4 million in 2014.

Impact on shipping companies

Lower OPEC output means fewer ships will be required to transport the raw material from the Middle East. The VLCCs (Very Large Crude Carriers)—which are the largest class of tankers used to mainly transport crude oil from Middle East and Africa to the rest of the world—will be most negatively affected by the development, followed by Suezmax ships that often ship oil on the same route. Frontline Ltd. (FRO), whose portfolio of ships holds the largest number of VLCCs, will be most negatively affected by the decline. While mid-size ships such as Suezmax and Aframax classes should fare better, they are nonetheless subject to a weak environment as well. So Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), and Nordic American Tanker Ltd. (NAT) aren’t clear either. This uncertainty also applies to the Guggenheim Shipping ETF (SEA).

  1. The OPEC is an oil cartel whose mission is to ensure a steady income to the member states and to supply oil to customers. It includes major oil-producing nations in the Middle East and Africa.

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