Would a continuing US oil boom be negative for tanker stocks?
Shale oil development continues
For the last couple of years, surging U.S. oil production has negatively affected oil imports and tanker demand. The latest data shows that U.S. rig count, a measure of rotary drilling activity in the United States, has hit an all-time high, as explorers and developers continue their search for shale oil domestically. Will the negative trend continue for crude tankers 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)?
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Recent data from the DOE (Department of Energy) shows U.S. weekly crude oil production has fluctuated near 8.1 million barrels a day. Perhaps due to the cold weather, work has stalled. Nonetheless, the EIA (Energy Information Administration) sees continued production increases—primarily from the Bakken, Eagle Ford, and Permian regions—which is expected to drive 8.5 million barrels a day of production in 2014, and 9.3 million in 2015. Since policy forbids the U.S. from exporting domestically produced crude oil, refiners must refine crude into product oils before exporting it.
Refiners, pipelines, and rails
While U.S. oil production is expected to rise further, the IEA (International Energy Agency) recently noted that whether the country’s refinery, pipeline, and crude rail capacity can expand fast enough to accommodate increased production is “open to debate.” According to information compiled by the Wall Street Journal and consulting firm IHS, American refiners are expected to add at least 400,000 barrels of oil refining capacity a day to existing plants between now and 2018 as refiners try to find ways to expand their capability of refining more light sweet crude from U.S. wells at aging plants.
Plans for new types of plants capable of processing just the ultralight oil extracted from U.S. shale oil are also in the works. These are relatively inexpensive to build, and they aren’t technically considered refineries because they’re not designed to refine a complex mix of crude types or produce wide varieties of product oils such as gasoline, kerosine, diesel, heavy fuel oils, lubricating oils, and petroleum coke. Instead, these plants will process crude halfway and ship it to other countries, where refiners there can complete the work.