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An overview of the crude tanker industry

Part 5
An overview of the crude tanker industry (Part 5 of 10)

How the US energy boom is changing the shipping industry

Where incremental oil occurs

Another important factor that could affect tanker demand is the location of incremental oil production. If countries like the United States, China, and Europe find domestic oil, it will negatively impact demand for import oil and tanker demand. This would adversely affect crude tanker stocks like FRO, NAT, TNP, TNK, and SEA.

World Crude Oil and Liquid Fuels Production Growth 2013-12-23Enlarge Graph

Times are changing

In the past, the world has been reliant on OPEC’s (Organization of Petroleum Exporting Countries) oil. But times are changing due to high oil prices and technology use, and non-OPEC producers are expected to contribute to a significant portion of incremental oil supply going forward. This can affect the logistics of the global oil trade and demand for oil shipments.

Changes in world oil trade

The U.S. shale oil boom is one of the latest developments that’s disrupting the flow of world oil trade. The use of hydraulic fracking and horizontal drilling techniques has allowed businesses to pump significant amounts of oil in the United States, so that even the price of WTI (West Texas Intermediate crude oil—the U.S. benchmark) is now below the international benchmark, Brent crude.

WTI and Brent Oil Price 2013-12-23Enlarge GraphThe WTI and Brent price spread

In the past, WTI prices have commanded a premium to Brent Crude since the U.S. is the largest oil importer. The difference between WTI and Brent prices reflected the cost of transportation to bring oil to the United States, and U.S. oil was of higher quality. But a supply glut is putting downward pressure on domestic oil price. This makes it more attractive for refiners to use domestic crude than imported crude, which bodes poorly for crude tankers.

Key sources

The U.S. Department of Energy is one place where investors can retrieve information on U.S. domestic oil production, and the EIA (Energy Information Administration) is a good source for oil production around the world. Two more indicators that investors can take a look at are Baker Hughes’ rotary rig count and well counts. Drillers explore for oil and construct wells for future oil production. So drilling activity may suggest where U.S. oil production will be in the future. These indicators will also be available on our website soon.

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