Breakdown of oil use
The breakdown of oil use is another key point for investors because it affects oil demand and imports, which in turn influences tanker demand and oil exports. As we saw earlier, the world’s three largest groups of oil importers are the United States, Europe, and China plus India.
Transportation and industry
In 2011, transportation and industry made up the majority of petroleum use in the United States. The transportation sector used as much as 71.01% of the country’s oil demand, while industrial use accounted for 23.17% in 2012, according to the Energy Information Agency. For the world as a whole, the use of oil in transportation makes up a smaller percentage, at roughly 57.38%, while industry makes up 34.00%. This is because countries in OECD, Europe, and China use a smaller percent of total oil for transportation and more for industrial uses.
Transportation and industrial sectors are largely driven by economic and manufacturing activities. So when macro leading indicators like the manufacturing purchasing managers’ index, initial unemployment claims, unemployment rates, and the number of working hours are improving, they often suggest improved demand for oil imports and crude tankers. Note, however, that because demand for oil can fluctuate significantly, demand for tankers can be volatile over a business cycle (just like oil prices). This means investors are better off investing in companies like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), and Teekay Tankers Ltd. (TNK) as a cyclical play rather than using a buy-and-hold strategy.
Since transportation is a significant oil user, auto sales influence oil demand too. This is particularly true in countries like China with high growth. As more people buy vehicles to drive, they’re more likely to use oil. Plus, vehicles aren’t cheap, so when people do purchase, it may imply improved current or expected economic activity. As these assets are usually financed with debt, high auto sales could be driven by the central bank’s push to lower (or maintain) a low interest rate as an incentive to spend.
For investors who’d like to dive in further, construction activity (particularly the housing sector) is something interesting to watch. Aside from using vehicles for personal transportation purposes, they’re also used to haul industrial goods. And products like wood, steel, bricks and concrete are pretty heavy.
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