Why oil tankers' recent rally could be sustainable

Part 6
Why oil tankers' recent rally could be sustainable (Part 6 of 9)

Why follow shifts in U.S. oil imports and global trade routes?

Improving demand

On the demand-side, fundamentals are looking better for tanker companies like Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP) as well as the Guggenheim Shipping ETF (SEA). Trade routes for crude oil shipments are undergoing significant changes as a result of booming U.S. oil output. While this trend was initially negative, as it caused refiners to use more domestic oil than to import OPEC oil, it could be turning positive.

U.S. Weekly Oil ImportEnlarge Graph

Longer voyages

As shipments between West Africa and the United States fell, West African producers had to find new customers in the East. Since it takes longer to ship goods from West Africa to China than it does to the U.S., demand for tankers essentially rises. While most analysts noted this as a story for 2014 and beyond, some suggest it’s already happening and has contributed to the recent surge in rates.

High-grade crude imports

Crude oil shipments to the United States have also been changing. U.S. shale oil is high quality (light and sweet), but refineries are configured to use different-quality crude as feed stocks. High-quality crude yields more high-value products like gasoline and diesel. On the other hand, low-quality crude yields larger amounts of lower-value petroleum products such as fuel oil. As domestic production of high-quality oil surged, the U.S. imported less foreign crude of high quality from countries such as Nigeria.

Low-grade crude imports

Note that Nigerian grades are distillate-rich, unlike the crude oil we find in the United States. This means refiners can’t produce as much distillate fuel as they want. So to make up for the loss in yield, refiners had to import lower-quality crude. As a result, U.S. oil imports from countries with oil of lower quality, such as Saudi Arabia and Canada, remained strong.

The underlying strength in U.S. imports from Saudi Arabia can also be attributed to the country’s willingness to price its product at a discount to the international benchmark, Brent crude, and protect itself from losing market share to domestic producers in the United States, according to Poten & Partners.

While fewer shipments from countries such as Nigeria are certainly negative, the longer voyage distance between Saudi Arabia and the United States is definitely positive for crude tankers.

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